Correlation Between Dongfeng Automobile and New China

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

By analyzing existing cross correlation between Dongfeng Automobile Co and New China Life, you can compare the effects of market volatilities on Dongfeng Automobile and New 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 Dongfeng Automobile with a short position of New China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dongfeng Automobile and New China.

Diversification Opportunities for Dongfeng Automobile and New China

0.48

Correlation Coefficient

Dongfeng Automobile  New China

Very weak diversification

The 3 months correlation between Dongfeng and New is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Dongfeng Automobile Co and New China Life in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New China Life and Dongfeng Automobile 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 Dongfeng Automobile Co are associated (or correlated) with New China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New China Life has no effect on the direction of Dongfeng Automobile i.e., Dongfeng Automobile and New China go up and down completely randomly.

Pair Corralation between Dongfeng Automobile and New China

Assuming the 90 days trading horizon Dongfeng Automobile is expected to generate 1.69 times less return on investment than New China. In addition to that, Dongfeng Automobile is 1.05 times more volatile than New China Life. It trades about 0.1 of its total potential returns per unit of risk. New China Life is currently generating about 0.17 per unit of volatility. If you would invest  3,285  in New China Life on October 3, 2024 and sell it today you would earn a total of  1,685  from holding New China Life or generate 51.29% return on investment over 90 days.

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

Dongfeng Automobile Co  vs.  New China Life

Dongfeng Automobile

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Automobile Co are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dongfeng Automobile may actually be approaching a critical reversion point that can send shares even higher in February 2025.

New China Life

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Dongfeng Automobile and New China

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

The idea behind Dongfeng Automobile Co and New China Life 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.