Correlation Between China Securities and XiAn Dagang

Can any of the company-specific risk be diversified away by investing in both China Securities and XiAn Dagang at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining China Securities and XiAn Dagang into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between China Securities 800 and XiAn Dagang Road, you can compare the effects of market volatilities on China Securities and XiAn Dagang and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in China Securities with a short position of XiAn Dagang. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Securities and XiAn Dagang.

Diversification Opportunities for China Securities and XiAn Dagang

0.59

Correlation Coefficient

China Securities  XiAn Dagang

Very weak diversification

The 3 months correlation between China and XiAn is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding China Securities 800 and XiAn Dagang Road in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on XiAn Dagang Road and China Securities is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on China Securities 800 are associated (or correlated) with XiAn Dagang. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of XiAn Dagang Road has no effect on the direction of China Securities i.e., China Securities and XiAn Dagang go up and down completely randomly.

Pair Corralation between China Securities and XiAn Dagang

Assuming the 90 days trading horizon China Securities is expected to generate 21.78 times less return on investment than XiAn Dagang. But when comparing it to its historical volatility, China Securities 800 is 3.43 times less risky than XiAn Dagang. It trades about 0.0 of its potential returns per unit of risk. XiAn Dagang Road is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  614.00  in XiAn Dagang Road on October 22, 2024 and sell it today you would lose (8.00) from holding XiAn Dagang Road or give up 1.3% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.48%
Values	Daily Returns

China Securities 800  vs.  XiAn Dagang Road

Pair Trading with China Securities and XiAn Dagang

The main advantage of trading using opposite China Securities and XiAn Dagang positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Securities position performs unexpectedly, XiAn Dagang can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in XiAn Dagang will offset losses from the drop in XiAn Dagang's long position.

The idea behind China Securities 800 and XiAn Dagang Road pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.