Correlation Between Dongbu Steel and Gyeongnam Steel

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

By analyzing existing cross correlation between Dongbu Steel Co and Gyeongnam Steel Co, you can compare the effects of market volatilities on Dongbu Steel and Gyeongnam Steel 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 Dongbu Steel with a short position of Gyeongnam Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dongbu Steel and Gyeongnam Steel.

Diversification Opportunities for Dongbu Steel and Gyeongnam Steel

0.12

Correlation Coefficient

Dongbu Steel  Gyeongnam Steel

Average diversification

The 3 months correlation between Dongbu and Gyeongnam is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Dongbu Steel Co and Gyeongnam Steel Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gyeongnam Steel and Dongbu Steel 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 Dongbu Steel Co are associated (or correlated) with Gyeongnam Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gyeongnam Steel has no effect on the direction of Dongbu Steel i.e., Dongbu Steel and Gyeongnam Steel go up and down completely randomly.

Pair Corralation between Dongbu Steel and Gyeongnam Steel

Assuming the 90 days trading horizon Dongbu Steel Co is expected to generate 1.32 times more return on investment than Gyeongnam Steel. However, Dongbu Steel is 1.32 times more volatile than Gyeongnam Steel Co. It trades about 0.11 of its potential returns per unit of risk. Gyeongnam Steel Co is currently generating about 0.03 per unit of risk. If you would invest  584,000  in Dongbu Steel Co on September 5, 2024 and sell it today you would earn a total of  72,000  from holding Dongbu Steel Co or generate 12.33% return on investment over 90 days.

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

Dongbu Steel Co  vs.  Gyeongnam Steel Co

Dongbu Steel

Risk-Adjusted Performance

8 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Dongbu Steel Co are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dongbu Steel sustained solid returns over the last few months and may actually be approaching a breakup point.

Gyeongnam Steel

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Gyeongnam Steel Co are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Gyeongnam Steel is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Dongbu Steel and Gyeongnam Steel

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

The idea behind Dongbu Steel Co and Gyeongnam Steel Co 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.