Correlation Between Nam Hwa and Busan Ind

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

By analyzing existing cross correlation between Nam Hwa Construction and Busan Ind, you can compare the effects of market volatilities on Nam Hwa and Busan Ind 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 Nam Hwa with a short position of Busan Ind. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nam Hwa and Busan Ind.

Diversification Opportunities for Nam Hwa and Busan Ind

0.35

Correlation Coefficient

Nam Hwa  Busan Ind

Weak diversification

The 3 months correlation between Nam and Busan is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Nam Hwa Construction and Busan Ind in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Busan Ind and Nam Hwa 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 Nam Hwa Construction are associated (or correlated) with Busan Ind. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Busan Ind has no effect on the direction of Nam Hwa i.e., Nam Hwa and Busan Ind go up and down completely randomly.

Pair Corralation between Nam Hwa and Busan Ind

Assuming the 90 days trading horizon Nam Hwa Construction is expected to under-perform the Busan Ind. But the stock apears to be less risky and, when comparing its historical volatility, Nam Hwa Construction is 1.2 times less risky than Busan Ind. The stock trades about -0.06 of its potential returns per unit of risk. The Busan Ind is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  7,788,820  in Busan Ind on October 4, 2024 and sell it today you would lose (338,820) from holding Busan Ind or give up 4.35% of portfolio value over 90 days.

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

Nam Hwa Construction  vs.  Busan Ind

Nam Hwa Construction

Risk-Adjusted Performance

0 of 100

Very Weak

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

Busan Ind

Risk-Adjusted Performance

10 of 100

OK

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

Pair Trading with Nam Hwa and Busan Ind

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

The idea behind Nam Hwa Construction and Busan Ind 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.