Correlation Between Iron Road and China Railway

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

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

Diversification Opportunities for Iron Road and China Railway

-0.58

Correlation Coefficient

Iron Road  China Railway

Excellent diversification

The 3 months correlation between Iron and China is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Iron Road Limited and China Railway Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Signal and Iron Road 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 Iron Road Limited are associated (or correlated) with China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Signal has no effect on the direction of Iron Road i.e., Iron Road and China Railway go up and down completely randomly.

Pair Corralation between Iron Road and China Railway

Assuming the 90 days horizon Iron Road Limited is expected to under-perform the China Railway. In addition to that, Iron Road is 2.98 times more volatile than China Railway Signal. It trades about -0.03 of its total potential returns per unit of risk. China Railway Signal is currently generating about 0.2 per unit of volatility. If you would invest  33.00  in China Railway Signal on October 6, 2024 and sell it today you would earn a total of  7.00  from holding China Railway Signal or generate 21.21% return on investment over 90 days.

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

Iron Road Limited  vs.  China Railway Signal

Iron Road Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

China Railway Signal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Railway Signal 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.

Pair Trading with Iron Road and China Railway

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

The idea behind Iron Road Limited and China Railway Signal 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.