Correlation Between China Railway and Weihai Honglin

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

Diversification Opportunities for China Railway and Weihai Honglin

-0.65

Correlation Coefficient

China Railway  Weihai Honglin

Excellent diversification

The 3 months correlation between China and Weihai is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Materials and Weihai Honglin Electronic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Weihai Honglin Electronic 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 Weihai Honglin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Weihai Honglin Electronic has no effect on the direction of China Railway i.e., China Railway and Weihai Honglin go up and down completely randomly.

Pair Corralation between China Railway and Weihai Honglin

Assuming the 90 days trading horizon China Railway Materials is expected to under-perform the Weihai Honglin. But the stock apears to be less risky and, when comparing its historical volatility, China Railway Materials is 2.86 times less risky than Weihai Honglin. The stock trades about -0.17 of its potential returns per unit of risk. The Weihai Honglin Electronic is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,387  in Weihai Honglin Electronic on December 2, 2024 and sell it today you would earn a total of  254.00  from holding Weihai Honglin Electronic or generate 18.31% return on investment over 90 days.

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

China Railway Materials  vs.  Weihai Honglin Electronic

China Railway Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Railway Materials has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Weihai Honglin Electronic

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Weihai Honglin Electronic are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Weihai Honglin sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and Weihai Honglin

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

The idea behind China Railway Materials and Weihai Honglin Electronic 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.