Correlation Between China Railway and Zhejiang Construction

Can any of the company-specific risk be diversified away by investing in both China Railway and Zhejiang Construction 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 Railway and Zhejiang Construction into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between China Railway Materials and Zhejiang Construction Investment, you can compare the effects of market volatilities on China Railway and Zhejiang Construction 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 Railway with a short position of Zhejiang Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Railway and Zhejiang Construction.

Diversification Opportunities for China Railway and Zhejiang Construction

0.79

Correlation Coefficient

China Railway  Zhejiang Construction

Poor diversification

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

Pair Corralation between China Railway and Zhejiang Construction

Assuming the 90 days trading horizon China Railway Materials is expected to generate 0.59 times more return on investment than Zhejiang Construction. However, China Railway Materials is 1.7 times less risky than Zhejiang Construction. It trades about 0.01 of its potential returns per unit of risk. Zhejiang Construction Investment is currently generating about 0.01 per unit of risk. If you would invest  267.00  in China Railway Materials on September 25, 2024 and sell it today you would earn a total of  4.00  from holding China Railway Materials or generate 1.5% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.58%
Values	Daily Returns

China Railway Materials  vs.  Zhejiang Construction Investme

China Railway Materials

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Materials are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Railway may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Zhejiang Construction

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Zhejiang Construction Investment are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Zhejiang Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and Zhejiang Construction

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

The idea behind China Railway Materials and Zhejiang Construction Investment 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.