Correlation Between Gansu Jiu and Chongqing Changan

Can any of the company-specific risk be diversified away by investing in both Gansu Jiu and Chongqing Changan 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 Gansu Jiu and Chongqing Changan into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Gansu Jiu Steel and Chongqing Changan Automobile, you can compare the effects of market volatilities on Gansu Jiu and Chongqing Changan 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 Gansu Jiu with a short position of Chongqing Changan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Gansu Jiu and Chongqing Changan.

Diversification Opportunities for Gansu Jiu and Chongqing Changan

0.6

Correlation Coefficient

Gansu Jiu  Chongqing Changan

Poor diversification

The 3 months correlation between Gansu and Chongqing is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Gansu Jiu Steel and Chongqing Changan Automobile in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chongqing Changan and Gansu Jiu 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 Gansu Jiu Steel are associated (or correlated) with Chongqing Changan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chongqing Changan has no effect on the direction of Gansu Jiu i.e., Gansu Jiu and Chongqing Changan go up and down completely randomly.

Pair Corralation between Gansu Jiu and Chongqing Changan

Assuming the 90 days trading horizon Gansu Jiu Steel is expected to generate 1.35 times more return on investment than Chongqing Changan. However, Gansu Jiu is 1.35 times more volatile than Chongqing Changan Automobile. It trades about 0.06 of its potential returns per unit of risk. Chongqing Changan Automobile is currently generating about 0.03 per unit of risk. If you would invest  131.00  in Gansu Jiu Steel on October 24, 2024 and sell it today you would earn a total of  16.00  from holding Gansu Jiu Steel or generate 12.21% return on investment over 90 days.

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

Gansu Jiu Steel  vs.  Chongqing Changan Automobile

Gansu Jiu Steel

Risk-Adjusted Performance

0 of 100

Weak

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

Chongqing Changan

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Gansu Jiu and Chongqing Changan

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

The idea behind Gansu Jiu Steel and Chongqing Changan Automobile 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.