Correlation Between China General and Cathay Chemical

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

By analyzing existing cross correlation between China General Plastics and Cathay Chemical Works, you can compare the effects of market volatilities on China General and Cathay Chemical 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 General with a short position of Cathay Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of China General and Cathay Chemical.

Diversification Opportunities for China General and Cathay Chemical

0.74

Correlation Coefficient

China General  Cathay Chemical

Poor diversification

The 3 months correlation between China and Cathay is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding China General Plastics and Cathay Chemical Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Chemical Works and China General 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 General Plastics are associated (or correlated) with Cathay Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Chemical Works has no effect on the direction of China General i.e., China General and Cathay Chemical go up and down completely randomly.

Pair Corralation between China General and Cathay Chemical

Assuming the 90 days trading horizon China General is expected to generate 2.57 times less return on investment than Cathay Chemical. In addition to that, China General is 1.46 times more volatile than Cathay Chemical Works. It trades about 0.05 of its total potential returns per unit of risk. Cathay Chemical Works is currently generating about 0.2 per unit of volatility. If you would invest  4,610  in Cathay Chemical Works on December 22, 2024 and sell it today you would earn a total of  950.00  from holding Cathay Chemical Works or generate 20.61% return on investment over 90 days.

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

China General Plastics  vs.  Cathay Chemical Works

China General Plastics

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China General Plastics are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China General may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Cathay Chemical Works

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Chemical Works are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Cathay Chemical showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China General and Cathay Chemical

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

The idea behind China General Plastics and Cathay Chemical Works 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 Anywhere module to track or share privately all of your investments from the convenience of any device.