Correlation Between Cathay Financial and China Petrochemical

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

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

Diversification Opportunities for Cathay Financial and China Petrochemical

-0.03

Correlation Coefficient

Cathay Financial  China Petrochemical

Good diversification

The 3 months correlation between Cathay and China is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Financial Holding and China Petrochemical Developmen in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Petrochemical and Cathay Financial 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 Financial Holding are associated (or correlated) with China Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Petrochemical has no effect on the direction of Cathay Financial i.e., Cathay Financial and China Petrochemical go up and down completely randomly.

Pair Corralation between Cathay Financial and China Petrochemical

Assuming the 90 days trading horizon Cathay Financial is expected to generate 2.32 times less return on investment than China Petrochemical. But when comparing it to its historical volatility, Cathay Financial Holding is 8.94 times less risky than China Petrochemical. It trades about 0.19 of its potential returns per unit of risk. China Petrochemical Development is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  804.00  in China Petrochemical Development on December 2, 2024 and sell it today you would earn a total of  32.00  from holding China Petrochemical Development or generate 3.98% return on investment over 90 days.

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

Cathay Financial Holding  vs.  China Petrochemical Developmen

Cathay Financial Holding

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Cathay Financial is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

China Petrochemical

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Petrochemical Development are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, China Petrochemical 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 Financial and China Petrochemical

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

The idea behind Cathay Financial Holding and China Petrochemical Development 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.