Correlation Between Tonghua Grape and Ningbo Thermal

Can any of the company-specific risk be diversified away by investing in both Tonghua Grape and Ningbo Thermal 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 Tonghua Grape and Ningbo Thermal into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Tonghua Grape Wine and Ningbo Thermal Power, you can compare the effects of market volatilities on Tonghua Grape and Ningbo Thermal 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 Tonghua Grape with a short position of Ningbo Thermal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tonghua Grape and Ningbo Thermal.

Diversification Opportunities for Tonghua Grape and Ningbo Thermal

0.58

Correlation Coefficient

Tonghua Grape  Ningbo Thermal

Very weak diversification

The 3 months correlation between Tonghua and Ningbo is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Tonghua Grape Wine and Ningbo Thermal Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ningbo Thermal Power and Tonghua Grape 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 Tonghua Grape Wine are associated (or correlated) with Ningbo Thermal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ningbo Thermal Power has no effect on the direction of Tonghua Grape i.e., Tonghua Grape and Ningbo Thermal go up and down completely randomly.

Pair Corralation between Tonghua Grape and Ningbo Thermal

Assuming the 90 days trading horizon Tonghua Grape Wine is expected to under-perform the Ningbo Thermal. But the stock apears to be less risky and, when comparing its historical volatility, Tonghua Grape Wine is 2.17 times less risky than Ningbo Thermal. The stock trades about -0.16 of its potential returns per unit of risk. The Ningbo Thermal Power is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  414.00  in Ningbo Thermal Power on October 8, 2024 and sell it today you would lose (17.00) from holding Ningbo Thermal Power or give up 4.11% of portfolio value over 90 days.

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

Tonghua Grape Wine  vs.  Ningbo Thermal Power

Tonghua Grape Wine

Risk-Adjusted Performance

1 of 100

Weak

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

Ningbo Thermal Power

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Tonghua Grape and Ningbo Thermal

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

The idea behind Tonghua Grape Wine and Ningbo Thermal Power 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.