Correlation Between Huafa Industrial and Shaanxi Construction

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

By analyzing existing cross correlation between Huafa Industrial Co and Shaanxi Construction Machinery, you can compare the effects of market volatilities on Huafa Industrial and Shaanxi Construction 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 Huafa Industrial with a short position of Shaanxi Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Huafa Industrial and Shaanxi Construction.

Diversification Opportunities for Huafa Industrial and Shaanxi Construction

0.68

Correlation Coefficient

Huafa Industrial  Shaanxi Construction

Poor diversification

The 3 months correlation between Huafa and Shaanxi is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Huafa Industrial Co and Shaanxi Construction Machinery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shaanxi Construction and Huafa Industrial 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 Huafa Industrial Co are associated (or correlated) with Shaanxi Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shaanxi Construction has no effect on the direction of Huafa Industrial i.e., Huafa Industrial and Shaanxi Construction go up and down completely randomly.

Pair Corralation between Huafa Industrial and Shaanxi Construction

Assuming the 90 days trading horizon Huafa Industrial Co is expected to under-perform the Shaanxi Construction. But the stock apears to be less risky and, when comparing its historical volatility, Huafa Industrial Co is 2.22 times less risky than Shaanxi Construction. The stock trades about -0.13 of its potential returns per unit of risk. The Shaanxi Construction Machinery is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  350.00  in Shaanxi Construction Machinery on December 4, 2024 and sell it today you would earn a total of  3.00  from holding Shaanxi Construction Machinery or generate 0.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.28%
Values	Daily Returns

Huafa Industrial Co  vs.  Shaanxi Construction Machinery

Huafa Industrial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Huafa Industrial Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Shaanxi Construction

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Shaanxi Construction Machinery are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Shaanxi Construction is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Huafa Industrial and Shaanxi Construction

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

The idea behind Huafa Industrial Co and Shaanxi Construction Machinery 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.