Correlation Between Hwabao WP and Digital China

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

By analyzing existing cross correlation between Hwabao WP CSI and Digital China Information, you can compare the effects of market volatilities on Hwabao WP and Digital China 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 Hwabao WP with a short position of Digital China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hwabao WP and Digital China.

Diversification Opportunities for Hwabao WP and Digital China

0.66

Correlation Coefficient

Hwabao WP  Digital China

Poor diversification

The 3 months correlation between Hwabao and Digital is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Hwabao WP CSI and Digital China Information in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital China Information and Hwabao WP 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 Hwabao WP CSI are associated (or correlated) with Digital China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital China Information has no effect on the direction of Hwabao WP i.e., Hwabao WP and Digital China go up and down completely randomly.

Pair Corralation between Hwabao WP and Digital China

Assuming the 90 days trading horizon Hwabao WP CSI is expected to generate 0.58 times more return on investment than Digital China. However, Hwabao WP CSI is 1.73 times less risky than Digital China. It trades about 0.04 of its potential returns per unit of risk. Digital China Information is currently generating about 0.02 per unit of risk. If you would invest  107.00  in Hwabao WP CSI on October 7, 2024 and sell it today you would earn a total of  17.00  from holding Hwabao WP CSI or generate 15.89% return on investment over 90 days.

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

Hwabao WP CSI  vs.  Digital China Information

Hwabao WP CSI

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Hwabao WP CSI has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Hwabao WP is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Digital China Information

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital China Information has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Hwabao WP and Digital China

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

The idea behind Hwabao WP CSI and Digital China Information 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 Transaction History module to view history of all your transactions and understand their impact on performance.