Correlation Between Cathay Chemical and Klingon Aerospace

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

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

Diversification Opportunities for Cathay Chemical and Klingon Aerospace

0.17

Correlation Coefficient

Cathay Chemical  Klingon Aerospace

Average diversification

The 3 months correlation between Cathay and Klingon is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Chemical Works and Klingon Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Klingon Aerospace and Cathay Chemical 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 Cathay Chemical Works are associated (or correlated) with Klingon Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Klingon Aerospace has no effect on the direction of Cathay Chemical i.e., Cathay Chemical and Klingon Aerospace go up and down completely randomly.

Pair Corralation between Cathay Chemical and Klingon Aerospace

Assuming the 90 days trading horizon Cathay Chemical is expected to generate 1.28 times less return on investment than Klingon Aerospace. But when comparing it to its historical volatility, Cathay Chemical Works is 1.33 times less risky than Klingon Aerospace. It trades about 0.25 of its potential returns per unit of risk. Klingon Aerospace is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  2,180  in Klingon Aerospace on December 4, 2024 and sell it today you would earn a total of  295.00  from holding Klingon Aerospace or generate 13.53% return on investment over 90 days.

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

Cathay Chemical Works  vs.  Klingon Aerospace

Cathay Chemical Works

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Chemical Works are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Cathay Chemical showed solid returns over the last few months and may actually be approaching a breakup point.

Klingon Aerospace

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Cathay Chemical and Klingon Aerospace

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

The idea behind Cathay Chemical Works and Klingon Aerospace 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.