Correlation Between China Steel and Prime Oil

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

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

Diversification Opportunities for China Steel and Prime Oil

-0.29

Correlation Coefficient

China Steel  Prime Oil

Very good diversification

The 3 months correlation between China and Prime is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding China Steel Corp and Prime Oil Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prime Oil Chemical and China Steel 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 Steel Corp are associated (or correlated) with Prime Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prime Oil Chemical has no effect on the direction of China Steel i.e., China Steel and Prime Oil go up and down completely randomly.

Pair Corralation between China Steel and Prime Oil

Assuming the 90 days trading horizon China Steel Corp is expected to under-perform the Prime Oil. But the stock apears to be less risky and, when comparing its historical volatility, China Steel Corp is 3.38 times less risky than Prime Oil. The stock trades about -0.2 of its potential returns per unit of risk. The Prime Oil Chemical is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,780  in Prime Oil Chemical on December 29, 2024 and sell it today you would earn a total of  70.00  from holding Prime Oil Chemical or generate 3.93% return on investment over 90 days.

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

China Steel Corp  vs.  Prime Oil Chemical

China Steel Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Steel Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, China Steel is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Prime Oil Chemical

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Prime Oil Chemical are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Prime Oil 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 China Steel and Prime Oil

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

The idea behind China Steel Corp and Prime Oil Chemical 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.