Correlation Between Shanghai Construction and Digital China

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

By analyzing existing cross correlation between Shanghai Construction Group and Digital China Information, you can compare the effects of market volatilities on Shanghai Construction and Digital 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 Shanghai Construction with a short position of Digital China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Construction and Digital China.

Diversification Opportunities for Shanghai Construction and Digital China

0.59

Correlation Coefficient

Shanghai Construction  Digital China

Very weak diversification

The 3 months correlation between Shanghai and Digital is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Construction Group and Digital China Information in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital China Information and Shanghai Construction 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 Shanghai Construction Group are associated (or correlated) with Digital China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital China Information has no effect on the direction of Shanghai Construction i.e., Shanghai Construction and Digital China go up and down completely randomly.

Pair Corralation between Shanghai Construction and Digital China

Assuming the 90 days trading horizon Shanghai Construction is expected to generate 3.02 times less return on investment than Digital China. But when comparing it to its historical volatility, Shanghai Construction Group is 1.75 times less risky than Digital China. It trades about 0.01 of its potential returns per unit of risk. Digital China Information is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,033  in Digital China Information on October 9, 2024 and sell it today you would lose (28.00) from holding Digital China Information or give up 2.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.8%
Values	Daily Returns

Shanghai Construction Group  vs.  Digital China Information

Shanghai Construction

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Construction Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Digital China Information

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital China Information has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Shanghai Construction and Digital China

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

The idea behind Shanghai Construction Group and Digital China Information 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.