Correlation Between China Railway and Eastern Communications

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

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

Diversification Opportunities for China Railway and Eastern Communications

0.75

Correlation Coefficient

China Railway  Eastern Communications

Poor diversification

The 3 months correlation between China and Eastern is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Tielong and Eastern Communications Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastern Communications and China Railway 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 Railway Tielong are associated (or correlated) with Eastern Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastern Communications has no effect on the direction of China Railway i.e., China Railway and Eastern Communications go up and down completely randomly.

Pair Corralation between China Railway and Eastern Communications

Assuming the 90 days trading horizon China Railway Tielong is expected to under-perform the Eastern Communications. But the stock apears to be less risky and, when comparing its historical volatility, China Railway Tielong is 1.78 times less risky than Eastern Communications. The stock trades about -0.5 of its potential returns per unit of risk. The Eastern Communications Co is currently generating about -0.26 of returns per unit of risk over similar time horizon. If you would invest  43.00  in Eastern Communications Co on October 9, 2024 and sell it today you would lose (5.00) from holding Eastern Communications Co or give up 11.63% of portfolio value over 90 days.

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

China Railway Tielong  vs.  Eastern Communications Co

China Railway Tielong

Risk-Adjusted Performance

0 of 100

Very Weak

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

Eastern Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eastern Communications Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Eastern Communications 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 Railway and Eastern Communications

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

The idea behind China Railway Tielong and Eastern Communications Co 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.