Correlation Between China Railway and Norsk Hydro

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

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

Diversification Opportunities for China Railway and Norsk Hydro

0.1

Correlation Coefficient

China Railway  Norsk Hydro

Average diversification

The 3 months correlation between China and Norsk is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Construction and Norsk Hydro ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norsk Hydro ASA and China Railway 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 Railway Construction are associated (or correlated) with Norsk Hydro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norsk Hydro ASA has no effect on the direction of China Railway i.e., China Railway and Norsk Hydro go up and down completely randomly.

Pair Corralation between China Railway and Norsk Hydro

Assuming the 90 days horizon China Railway Construction is expected to generate 1.36 times more return on investment than Norsk Hydro. However, China Railway is 1.36 times more volatile than Norsk Hydro ASA. It trades about 0.05 of its potential returns per unit of risk. Norsk Hydro ASA is currently generating about 0.03 per unit of risk. If you would invest  29.00  in China Railway Construction on October 4, 2024 and sell it today you would earn a total of  35.00  from holding China Railway Construction or generate 120.69% return on investment over 90 days.

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

China Railway Construction  vs.  Norsk Hydro ASA

China Railway Constr

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Railway Construction has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, China Railway is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Norsk Hydro ASA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Norsk Hydro ASA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's technical indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with China Railway and Norsk Hydro

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

The idea behind China Railway Construction and Norsk Hydro ASA 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.