Correlation Between China Longyuan and Shandong Pharmaceutical

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

By analyzing existing cross correlation between China Longyuan Power and Shandong Pharmaceutical Glass, you can compare the effects of market volatilities on China Longyuan and Shandong Pharmaceutical 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 Longyuan with a short position of Shandong Pharmaceutical. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Longyuan and Shandong Pharmaceutical.

Diversification Opportunities for China Longyuan and Shandong Pharmaceutical

-0.18

Correlation Coefficient

China Longyuan  Shandong Pharmaceutical

Good diversification

The 3 months correlation between China and Shandong is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding China Longyuan Power and Shandong Pharmaceutical Glass in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Pharmaceutical and China Longyuan 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 Longyuan Power are associated (or correlated) with Shandong Pharmaceutical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Pharmaceutical has no effect on the direction of China Longyuan i.e., China Longyuan and Shandong Pharmaceutical go up and down completely randomly.

Pair Corralation between China Longyuan and Shandong Pharmaceutical

Assuming the 90 days trading horizon China Longyuan Power is expected to generate 1.13 times more return on investment than Shandong Pharmaceutical. However, China Longyuan is 1.13 times more volatile than Shandong Pharmaceutical Glass. It trades about -0.05 of its potential returns per unit of risk. Shandong Pharmaceutical Glass is currently generating about -0.12 per unit of risk. If you would invest  1,652  in China Longyuan Power on December 25, 2024 and sell it today you would lose (72.00) from holding China Longyuan Power or give up 4.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.28%
Values	Daily Returns

China Longyuan Power  vs.  Shandong Pharmaceutical Glass

China Longyuan Power

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Longyuan Power has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China Longyuan is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Shandong Pharmaceutical

Risk-Adjusted Performance

Very Weak

Over the last 90 days Shandong Pharmaceutical Glass has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with China Longyuan and Shandong Pharmaceutical

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

The idea behind China Longyuan Power and Shandong Pharmaceutical Glass 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.