Correlation Between China Securities and Nancal Energy

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

Diversification Opportunities for China Securities and Nancal Energy

0.79

Correlation Coefficient

China Securities  Nancal Energy

Poor diversification

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

Pair Corralation between China Securities and Nancal Energy

Assuming the 90 days trading horizon China Securities is expected to generate 3.55 times less return on investment than Nancal Energy. But when comparing it to its historical volatility, China Securities 800 is 2.12 times less risky than Nancal Energy. It trades about 0.17 of its potential returns per unit of risk. Nancal Energy Saving Tech is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  1,454  in Nancal Energy Saving Tech on September 4, 2024 and sell it today you would earn a total of  1,565  from holding Nancal Energy Saving Tech or generate 107.63% 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.  Nancal Energy Saving Tech

Pair Trading with China Securities and Nancal Energy

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

The idea behind China Securities 800 and Nancal Energy Saving Tech 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.