Correlation Between China Securities and Shandong Iron

Can any of the company-specific risk be diversified away by investing in both China Securities and Shandong Iron 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 Shandong Iron 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 Shandong Iron and, you can compare the effects of market volatilities on China Securities and Shandong Iron 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 Shandong Iron. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Securities and Shandong Iron.

Diversification Opportunities for China Securities and Shandong Iron

0.79

Correlation Coefficient

China Securities  Shandong Iron

Poor diversification

The 3 months correlation between China and Shandong is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding China Securities 800 and Shandong Iron and in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Iron 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 Shandong Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Iron has no effect on the direction of China Securities i.e., China Securities and Shandong Iron go up and down completely randomly.

Pair Corralation between China Securities and Shandong Iron

Assuming the 90 days trading horizon China Securities 800 is expected to under-perform the Shandong Iron. But the index apears to be less risky and, when comparing its historical volatility, China Securities 800 is 2.27 times less risky than Shandong Iron. The index trades about -0.03 of its potential returns per unit of risk. The Shandong Iron and is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  136.00  in Shandong Iron and on October 20, 2024 and sell it today you would earn a total of  2.00  from holding Shandong Iron and or generate 1.47% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

China Securities 800  vs.  Shandong Iron and

Pair Trading with China Securities and Shandong Iron

The main advantage of trading using opposite China Securities and Shandong Iron positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Securities position performs unexpectedly, Shandong Iron 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 Shandong Iron will offset losses from the drop in Shandong Iron's long position.

The idea behind China Securities 800 and Shandong Iron and 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.

Check out your portfolio center.

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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.