Correlation Between Hubei Xingfa and Beijing Compass

Can any of the company-specific risk be diversified away by investing in both Hubei Xingfa and Beijing Compass 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 Hubei Xingfa and Beijing Compass into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Hubei Xingfa Chemicals and Beijing Compass Technology, you can compare the effects of market volatilities on Hubei Xingfa and Beijing Compass 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 Hubei Xingfa with a short position of Beijing Compass. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hubei Xingfa and Beijing Compass.

Diversification Opportunities for Hubei Xingfa and Beijing Compass

0.48

Correlation Coefficient

Hubei Xingfa  Beijing Compass

Very weak diversification

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

Pair Corralation between Hubei Xingfa and Beijing Compass

Assuming the 90 days trading horizon Hubei Xingfa Chemicals is expected to generate 0.34 times more return on investment than Beijing Compass. However, Hubei Xingfa Chemicals is 2.98 times less risky than Beijing Compass. It trades about -0.27 of its potential returns per unit of risk. Beijing Compass Technology is currently generating about -0.25 per unit of risk. If you would invest  2,276  in Hubei Xingfa Chemicals on October 11, 2024 and sell it today you would lose (154.00) from holding Hubei Xingfa Chemicals or give up 6.77% of portfolio value over 90 days.

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

Hubei Xingfa Chemicals  vs.  Beijing Compass Technology

Hubei Xingfa Chemicals

Risk-Adjusted Performance

0 of 100

Very Weak

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

Beijing Compass Tech

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Beijing Compass Technology are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Beijing Compass sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Hubei Xingfa and Beijing Compass

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

The idea behind Hubei Xingfa Chemicals and Beijing Compass 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.

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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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.