Correlation Between China Express and Guangzhou Automobile

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

By analyzing existing cross correlation between China Express Airlines and Guangzhou Automobile Group, you can compare the effects of market volatilities on China Express and Guangzhou Automobile 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 Express with a short position of Guangzhou Automobile. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Express and Guangzhou Automobile.

Diversification Opportunities for China Express and Guangzhou Automobile

0.67

Correlation Coefficient

China Express  Guangzhou Automobile

Poor diversification

The 3 months correlation between China and Guangzhou is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding China Express Airlines and Guangzhou Automobile Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guangzhou Automobile and China Express 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 Express Airlines are associated (or correlated) with Guangzhou Automobile. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guangzhou Automobile has no effect on the direction of China Express i.e., China Express and Guangzhou Automobile go up and down completely randomly.

Pair Corralation between China Express and Guangzhou Automobile

Assuming the 90 days trading horizon China Express Airlines is expected to under-perform the Guangzhou Automobile. But the stock apears to be less risky and, when comparing its historical volatility, China Express Airlines is 2.17 times less risky than Guangzhou Automobile. The stock trades about -0.18 of its potential returns per unit of risk. The Guangzhou Automobile Group is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  878.00  in Guangzhou Automobile Group on September 24, 2024 and sell it today you would earn a total of  61.00  from holding Guangzhou Automobile Group or generate 6.95% return on investment over 90 days.

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

China Express Airlines  vs.  Guangzhou Automobile Group

China Express Airlines

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Express Airlines are ranked lower than 15 (%) 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.

Guangzhou Automobile

Risk-Adjusted Performance

10 of 100

OK

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

Pair Trading with China Express and Guangzhou Automobile

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

The idea behind China Express Airlines and Guangzhou Automobile Group 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.