Correlation Between China Energy and China Communications

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

By analyzing existing cross correlation between China Energy Engineering and China Communications Construction, you can compare the effects of market volatilities on China Energy and China Communications 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 Energy with a short position of China Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Energy and China Communications.

Diversification Opportunities for China Energy and China Communications

0.73

Correlation Coefficient

China Energy  China Communications

Poor diversification

The 3 months correlation between China and China is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding China Energy Engineering and China Communications Construct in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Communications and China Energy 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 Energy Engineering are associated (or correlated) with China Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Communications has no effect on the direction of China Energy i.e., China Energy and China Communications go up and down completely randomly.

Pair Corralation between China Energy and China Communications

Assuming the 90 days horizon China Energy is expected to generate 1.97 times less return on investment than China Communications. But when comparing it to its historical volatility, China Energy Engineering is 1.3 times less risky than China Communications. It trades about 0.19 of its potential returns per unit of risk. China Communications Construction is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  45.00  in China Communications Construction on September 23, 2024 and sell it today you would earn a total of  20.00  from holding China Communications Construction or generate 44.44% return on investment over 90 days.

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

China Energy Engineering  vs.  China Communications Construct

China Energy Engineering

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Energy Engineering are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Energy reported solid returns over the last few months and may actually be approaching a breakup point.

China Communications

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Communications Construction are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Communications reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Energy and China Communications

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

The idea behind China Energy Engineering and China Communications Construction 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.