Correlation Between Far Eastern and China

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

By analyzing existing cross correlation between Far Eastern New and China Motor Corp, you can compare the effects of market volatilities on Far Eastern and China 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 Far Eastern with a short position of China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Far Eastern and China.

Diversification Opportunities for Far Eastern and China

-0.3

Correlation Coefficient

Far Eastern  China

Very good diversification

The 3 months correlation between Far and China is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Far Eastern New and China Motor Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Motor Corp and Far Eastern 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 Far Eastern New are associated (or correlated) with China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Motor Corp has no effect on the direction of Far Eastern i.e., Far Eastern and China go up and down completely randomly.

Pair Corralation between Far Eastern and China

Assuming the 90 days trading horizon Far Eastern New is expected to under-perform the China. But the stock apears to be less risky and, when comparing its historical volatility, Far Eastern New is 1.72 times less risky than China. The stock trades about -0.06 of its potential returns per unit of risk. The China Motor Corp is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  7,590  in China Motor Corp on September 3, 2024 and sell it today you would earn a total of  840.00  from holding China Motor Corp or generate 11.07% return on investment over 90 days.

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

Far Eastern New  vs.  China Motor Corp

Far Eastern New

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Far Eastern New has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Far Eastern is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

China Motor Corp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Motor Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Far Eastern and China

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

The idea behind Far Eastern New and China Motor Corp 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.