Correlation Between Ningxia Building and Longjian Road

Can any of the company-specific risk be diversified away by investing in both Ningxia Building and Longjian Road 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 Ningxia Building and Longjian Road into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Ningxia Building Materials and Longjian Road Bridge, you can compare the effects of market volatilities on Ningxia Building and Longjian Road 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 Ningxia Building with a short position of Longjian Road. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ningxia Building and Longjian Road.

Diversification Opportunities for Ningxia Building and Longjian Road

0.75

Correlation Coefficient

Ningxia Building  Longjian Road

Poor diversification

The 3 months correlation between Ningxia and Longjian is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Ningxia Building Materials and Longjian Road Bridge in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Longjian Road Bridge and Ningxia Building 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 Ningxia Building Materials are associated (or correlated) with Longjian Road. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Longjian Road Bridge has no effect on the direction of Ningxia Building i.e., Ningxia Building and Longjian Road go up and down completely randomly.

Pair Corralation between Ningxia Building and Longjian Road

Assuming the 90 days trading horizon Ningxia Building is expected to generate 1.38 times less return on investment than Longjian Road. But when comparing it to its historical volatility, Ningxia Building Materials is 1.52 times less risky than Longjian Road. It trades about 0.02 of its potential returns per unit of risk. Longjian Road Bridge is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  402.00  in Longjian Road Bridge on October 3, 2024 and sell it today you would lose (2.00) from holding Longjian Road Bridge or give up 0.5% of portfolio value over 90 days.

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

Ningxia Building Materials  vs.  Longjian Road Bridge

Ningxia Building Mat

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ningxia Building Materials are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ningxia Building sustained solid returns over the last few months and may actually be approaching a breakup point.

Longjian Road Bridge

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Longjian Road Bridge are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Longjian Road may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Ningxia Building and Longjian Road

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

The idea behind Ningxia Building Materials and Longjian Road Bridge 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.