Correlation Between Shanghai Pudong and Hainan Development

Can any of the company-specific risk be diversified away by investing in both Shanghai Pudong and Hainan Development 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 Shanghai Pudong and Hainan Development into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Shanghai Pudong Development and Hainan Development Holdings, you can compare the effects of market volatilities on Shanghai Pudong and Hainan Development 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 Shanghai Pudong with a short position of Hainan Development. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Pudong and Hainan Development.

Diversification Opportunities for Shanghai Pudong and Hainan Development

-0.42

Correlation Coefficient

Shanghai Pudong  Hainan Development

Very good diversification

The 3 months correlation between Shanghai and Hainan is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Pudong Development and Hainan Development Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hainan Development and Shanghai Pudong 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 Shanghai Pudong Development are associated (or correlated) with Hainan Development. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hainan Development has no effect on the direction of Shanghai Pudong i.e., Shanghai Pudong and Hainan Development go up and down completely randomly.

Pair Corralation between Shanghai Pudong and Hainan Development

Assuming the 90 days trading horizon Shanghai Pudong Development is expected to generate 0.4 times more return on investment than Hainan Development. However, Shanghai Pudong Development is 2.49 times less risky than Hainan Development. It trades about 0.02 of its potential returns per unit of risk. Hainan Development Holdings is currently generating about 0.01 per unit of risk. If you would invest  1,034  in Shanghai Pudong Development on December 26, 2024 and sell it today you would earn a total of  13.00  from holding Shanghai Pudong Development or generate 1.26% return on investment over 90 days.

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

Shanghai Pudong Development  vs.  Hainan Development Holdings

Shanghai Pudong Deve

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Pudong Development are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Shanghai Pudong is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Hainan Development

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Shanghai Pudong and Hainan Development

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

The idea behind Shanghai Pudong Development and Hainan Development Holdings 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.