Correlation Between Hengli Petrochemical and Cofco Biochemical

Can any of the company-specific risk be diversified away by investing in both Hengli Petrochemical and Cofco Biochemical 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 Hengli Petrochemical and Cofco Biochemical into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Hengli Petrochemical Co and Cofco Biochemical Anhui, you can compare the effects of market volatilities on Hengli Petrochemical and Cofco Biochemical 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 Hengli Petrochemical with a short position of Cofco Biochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hengli Petrochemical and Cofco Biochemical.

Diversification Opportunities for Hengli Petrochemical and Cofco Biochemical

0.86

Correlation Coefficient

Hengli Petrochemical  Cofco Biochemical

Very poor diversification

The 3 months correlation between Hengli and Cofco is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Hengli Petrochemical Co and Cofco Biochemical Anhui in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cofco Biochemical Anhui and Hengli Petrochemical 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 Hengli Petrochemical Co are associated (or correlated) with Cofco Biochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cofco Biochemical Anhui has no effect on the direction of Hengli Petrochemical i.e., Hengli Petrochemical and Cofco Biochemical go up and down completely randomly.

Pair Corralation between Hengli Petrochemical and Cofco Biochemical

Assuming the 90 days trading horizon Hengli Petrochemical is expected to generate 1.13 times less return on investment than Cofco Biochemical. But when comparing it to its historical volatility, Hengli Petrochemical Co is 1.19 times less risky than Cofco Biochemical. It trades about 0.11 of its potential returns per unit of risk. Cofco Biochemical Anhui is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  492.00  in Cofco Biochemical Anhui on September 24, 2024 and sell it today you would earn a total of  86.00  from holding Cofco Biochemical Anhui or generate 17.48% return on investment over 90 days.

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

Hengli Petrochemical Co  vs.  Cofco Biochemical Anhui

Hengli Petrochemical

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Hengli Petrochemical Co are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hengli Petrochemical sustained solid returns over the last few months and may actually be approaching a breakup point.

Cofco Biochemical Anhui

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cofco Biochemical Anhui are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Cofco Biochemical sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Hengli Petrochemical and Cofco Biochemical

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

The idea behind Hengli Petrochemical Co and Cofco Biochemical Anhui 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.