Correlation Between China World and Aofu Environmental

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

By analyzing existing cross correlation between China World Trade and Aofu Environmental Technology, you can compare the effects of market volatilities on China World and Aofu Environmental 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 World with a short position of Aofu Environmental. Check out your portfolio center. Please also check ongoing floating volatility patterns of China World and Aofu Environmental.

Diversification Opportunities for China World and Aofu Environmental

-0.43

Correlation Coefficient

China World  Aofu Environmental

Very good diversification

The 3 months correlation between China and Aofu is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding China World Trade and Aofu Environmental Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aofu Environmental and China World 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 World Trade are associated (or correlated) with Aofu Environmental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aofu Environmental has no effect on the direction of China World i.e., China World and Aofu Environmental go up and down completely randomly.

Pair Corralation between China World and Aofu Environmental

Assuming the 90 days trading horizon China World is expected to generate 38.6 times less return on investment than Aofu Environmental. But when comparing it to its historical volatility, China World Trade is 1.74 times less risky than Aofu Environmental. It trades about 0.01 of its potential returns per unit of risk. Aofu Environmental Technology is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  750.00  in Aofu Environmental Technology on September 20, 2024 and sell it today you would earn a total of  429.00  from holding Aofu Environmental Technology or generate 57.2% return on investment over 90 days.

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

China World Trade  vs.  Aofu Environmental Technology

China World Trade

Risk-Adjusted Performance

0 of 100

Very Weak

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

Aofu Environmental

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aofu Environmental Technology are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Aofu Environmental sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China World and Aofu Environmental

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

The idea behind China World Trade and Aofu Environmental Technology 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.