Correlation Between China Railway and China Express

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

Diversification Opportunities for China Railway and China Express

0.92

Correlation Coefficient

China Railway  China Express

Almost no diversification

The 3 months correlation between China and China is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Materials and China Express Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Express Airlines 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 China Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Express Airlines has no effect on the direction of China Railway i.e., China Railway and China Express go up and down completely randomly.

Pair Corralation between China Railway and China Express

Assuming the 90 days trading horizon China Railway Materials is expected to generate 0.98 times more return on investment than China Express. However, China Railway Materials is 1.02 times less risky than China Express. It trades about -0.03 of its potential returns per unit of risk. China Express Airlines is currently generating about -0.26 per unit of risk. If you would invest  283.00  in China Railway Materials on September 22, 2024 and sell it today you would lose (4.00) from holding China Railway Materials or give up 1.41% of portfolio value over 90 days.

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

China Railway Materials  vs.  China Express Airlines

China Railway Materials

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Materials are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Railway sustained solid returns over the last few months and may actually be approaching a breakup point.

China Express Airlines

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Express Airlines are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Express sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and China Express

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

The idea behind China Railway Materials and China Express Airlines 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.