Correlation Between Major Drilling and China Coal

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

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

Diversification Opportunities for Major Drilling and China Coal

0.14

Correlation Coefficient

Major Drilling  China Coal

Average diversification

The 3 months correlation between Major and China is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Major Drilling Group and China Coal Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Coal Energy and Major Drilling 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 Major Drilling Group are associated (or correlated) with China Coal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Coal Energy has no effect on the direction of Major Drilling i.e., Major Drilling and China Coal go up and down completely randomly.

Pair Corralation between Major Drilling and China Coal

Assuming the 90 days horizon Major Drilling Group is expected to generate 0.78 times more return on investment than China Coal. However, Major Drilling Group is 1.28 times less risky than China Coal. It trades about 0.04 of its potential returns per unit of risk. China Coal Energy is currently generating about 0.03 per unit of risk. If you would invest  535.00  in Major Drilling Group on October 9, 2024 and sell it today you would earn a total of  20.00  from holding Major Drilling Group or generate 3.74% return on investment over 90 days.

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

Major Drilling Group  vs.  China Coal Energy

Major Drilling Group

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Major Drilling Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Major Drilling is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Coal Energy

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Coal Energy are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, China Coal is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Major Drilling and China Coal

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

The idea behind Major Drilling Group and China Coal Energy 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.