Correlation Between China Petroleum and Liuzhou Iron

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

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

Diversification Opportunities for China Petroleum and Liuzhou Iron

-0.34

Correlation Coefficient

China Petroleum  Liuzhou Iron

Very good diversification

The 3 months correlation between China and Liuzhou is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding China Petroleum Chemical and Liuzhou Iron Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liuzhou Iron Steel and China Petroleum 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 Petroleum Chemical are associated (or correlated) with Liuzhou Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liuzhou Iron Steel has no effect on the direction of China Petroleum i.e., China Petroleum and Liuzhou Iron go up and down completely randomly.

Pair Corralation between China Petroleum and Liuzhou Iron

Assuming the 90 days trading horizon China Petroleum Chemical is expected to generate 0.52 times more return on investment than Liuzhou Iron. However, China Petroleum Chemical is 1.91 times less risky than Liuzhou Iron. It trades about -0.08 of its potential returns per unit of risk. Liuzhou Iron Steel is currently generating about -0.04 per unit of risk. If you would invest  660.00  in China Petroleum Chemical on October 22, 2024 and sell it today you would lose (38.00) from holding China Petroleum Chemical or give up 5.76% of portfolio value over 90 days.

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

China Petroleum Chemical  vs.  Liuzhou Iron Steel

China Petroleum Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

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

Liuzhou Iron Steel

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with China Petroleum and Liuzhou Iron

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

The idea behind China Petroleum Chemical and Liuzhou Iron Steel 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.