Correlation Between Hainan Development and Chongqing Changan

Can any of the company-specific risk be diversified away by investing in both Hainan Development and Chongqing Changan 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 Hainan Development and Chongqing Changan into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Hainan Development Holdings and Chongqing Changan Automobile, you can compare the effects of market volatilities on Hainan Development and Chongqing Changan 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 Hainan Development with a short position of Chongqing Changan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hainan Development and Chongqing Changan.

Diversification Opportunities for Hainan Development and Chongqing Changan

0.26

Correlation Coefficient

Hainan Development  Chongqing Changan

Modest diversification

The 3 months correlation between Hainan and Chongqing is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Hainan Development Holdings and Chongqing Changan Automobile in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chongqing Changan and Hainan Development 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 Hainan Development Holdings are associated (or correlated) with Chongqing Changan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chongqing Changan has no effect on the direction of Hainan Development i.e., Hainan Development and Chongqing Changan go up and down completely randomly.

Pair Corralation between Hainan Development and Chongqing Changan

Assuming the 90 days trading horizon Hainan Development Holdings is expected to generate 2.04 times more return on investment than Chongqing Changan. However, Hainan Development is 2.04 times more volatile than Chongqing Changan Automobile. It trades about -0.15 of its potential returns per unit of risk. Chongqing Changan Automobile is currently generating about -0.33 per unit of risk. If you would invest  932.00  in Hainan Development Holdings on October 26, 2024 and sell it today you would lose (87.00) from holding Hainan Development Holdings or give up 9.33% of portfolio value over 90 days.

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

Hainan Development Holdings  vs.  Chongqing Changan Automobile

Hainan Development

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Hainan Development Holdings are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hainan Development sustained solid returns over the last few months and may actually be approaching a breakup point.

Chongqing Changan

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Chongqing Changan Automobile 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 Hainan Development and Chongqing Changan

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

The idea behind Hainan Development Holdings and Chongqing Changan Automobile 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.