Correlation Between Baoshan Iron and Sichuan Tianqi

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

By analyzing existing cross correlation between Baoshan Iron Steel and Sichuan Tianqi Lithium, you can compare the effects of market volatilities on Baoshan Iron and Sichuan Tianqi 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 Baoshan Iron with a short position of Sichuan Tianqi. Check out your portfolio center. Please also check ongoing floating volatility patterns of Baoshan Iron and Sichuan Tianqi.

Diversification Opportunities for Baoshan Iron and Sichuan Tianqi

0.74

Correlation Coefficient

Baoshan Iron  Sichuan Tianqi

Poor diversification

The 3 months correlation between Baoshan and Sichuan is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Baoshan Iron Steel and Sichuan Tianqi Lithium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sichuan Tianqi Lithium and Baoshan Iron 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 Baoshan Iron Steel are associated (or correlated) with Sichuan Tianqi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sichuan Tianqi Lithium has no effect on the direction of Baoshan Iron i.e., Baoshan Iron and Sichuan Tianqi go up and down completely randomly.

Pair Corralation between Baoshan Iron and Sichuan Tianqi

Assuming the 90 days trading horizon Baoshan Iron is expected to generate 4.02 times less return on investment than Sichuan Tianqi. But when comparing it to its historical volatility, Baoshan Iron Steel is 1.8 times less risky than Sichuan Tianqi. It trades about 0.02 of its potential returns per unit of risk. Sichuan Tianqi Lithium is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,010  in Sichuan Tianqi Lithium on September 22, 2024 and sell it today you would earn a total of  474.00  from holding Sichuan Tianqi Lithium or generate 15.75% return on investment over 90 days.

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

Baoshan Iron Steel  vs.  Sichuan Tianqi Lithium

Baoshan Iron Steel

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Baoshan Iron Steel are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Baoshan Iron sustained solid returns over the last few months and may actually be approaching a breakup point.

Sichuan Tianqi Lithium

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sichuan Tianqi Lithium are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sichuan Tianqi sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Baoshan Iron and Sichuan Tianqi

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

The idea behind Baoshan Iron Steel and Sichuan Tianqi Lithium 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.