Correlation Between China Man and Cathay Chemical

Can any of the company-specific risk be diversified away by investing in both China Man 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 Man 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 Man Made Fiber and Cathay Chemical Works, you can compare the effects of market volatilities on China Man 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 Man with a short position of Cathay Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Man and Cathay Chemical.

Diversification Opportunities for China Man and Cathay Chemical

0.27

Correlation Coefficient

China Man  Cathay Chemical

Modest diversification

The 3 months correlation between China and Cathay is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding China Man Made Fiber 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 Man 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 Man Made Fiber 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 Man i.e., China Man and Cathay Chemical go up and down completely randomly.

Pair Corralation between China Man and Cathay Chemical

Assuming the 90 days trading horizon China Man Made Fiber is expected to under-perform the Cathay Chemical. But the stock apears to be less risky and, when comparing its historical volatility, China Man Made Fiber is 1.43 times less risky than Cathay Chemical. The stock trades about -0.04 of its potential returns per unit of risk. The Cathay Chemical Works is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  4,605  in Cathay Chemical Works on December 27, 2024 and sell it today you would earn a total of  1,025  from holding Cathay Chemical Works or generate 22.26% return on investment over 90 days.

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

China Man Made Fiber  vs.  Cathay Chemical Works

China Man Made

Risk-Adjusted Performance

Very Weak

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

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 17 (%) 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.

Pair Trading with China Man and Cathay Chemical

The main advantage of trading using opposite China Man and Cathay Chemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Man 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 Man Made Fiber 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.

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.