Correlation Between China Railway and Wesfarmers

Can any of the company-specific risk be diversified away by investing in both China Railway and Wesfarmers 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 Wesfarmers 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 Wesfarmers Limited, you can compare the effects of market volatilities on China Railway and Wesfarmers 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 Wesfarmers. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Railway and Wesfarmers.

Diversification Opportunities for China Railway and Wesfarmers

-0.11

Correlation Coefficient

China Railway  Wesfarmers

Good diversification

The 3 months correlation between China and Wesfarmers is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Construction and Wesfarmers Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers Limited 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 Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers Limited has no effect on the direction of China Railway i.e., China Railway and Wesfarmers go up and down completely randomly.

Pair Corralation between China Railway and Wesfarmers

Assuming the 90 days horizon China Railway Construction is expected to generate 3.7 times more return on investment than Wesfarmers. However, China Railway is 3.7 times more volatile than Wesfarmers Limited. It trades about 0.05 of its potential returns per unit of risk. Wesfarmers Limited is currently generating about 0.07 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 Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

China Railway Construction  vs.  Wesfarmers Limited

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.

Wesfarmers Limited

Risk-Adjusted Performance

2 of 100

Weak

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

Pair Trading with China Railway and Wesfarmers

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

The idea behind China Railway Construction and Wesfarmers Limited 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.