Correlation Between Hubei Xingfa and Air China

Can any of the company-specific risk be diversified away by investing in both Hubei Xingfa and Air China 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 Air China 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 Air China Ltd, you can compare the effects of market volatilities on Hubei Xingfa and Air China 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 Air China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hubei Xingfa and Air China.

Diversification Opportunities for Hubei Xingfa and Air China

0.07

Correlation Coefficient

Hubei Xingfa  Air China

Significant diversification

The 3 months correlation between Hubei and Air is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Hubei Xingfa Chemicals and Air China Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China 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 Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China has no effect on the direction of Hubei Xingfa i.e., Hubei Xingfa and Air China go up and down completely randomly.

Pair Corralation between Hubei Xingfa and Air China

Assuming the 90 days trading horizon Hubei Xingfa Chemicals is expected to generate 0.7 times more return on investment than Air China. However, Hubei Xingfa Chemicals is 1.43 times less risky than Air China. It trades about -0.27 of its potential returns per unit of risk. Air China Ltd is currently generating about -0.44 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	Insignificant
Accuracy	100.0%
Values	Daily Returns

Hubei Xingfa Chemicals  vs.  Air China Ltd

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.

Air China

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Ltd are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Air China may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Hubei Xingfa and Air China

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

The idea behind Hubei Xingfa Chemicals and Air China Ltd 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.