Correlation Between Wuhan Xianglong and Huadong Medicine

Can any of the company-specific risk be diversified away by investing in both Wuhan Xianglong and Huadong Medicine 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 Wuhan Xianglong and Huadong Medicine into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Wuhan Xianglong Power and Huadong Medicine Co, you can compare the effects of market volatilities on Wuhan Xianglong and Huadong Medicine 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 Wuhan Xianglong with a short position of Huadong Medicine. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wuhan Xianglong and Huadong Medicine.

Diversification Opportunities for Wuhan Xianglong and Huadong Medicine

0.6

Correlation Coefficient

Wuhan Xianglong  Huadong Medicine

Poor diversification

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

Pair Corralation between Wuhan Xianglong and Huadong Medicine

Assuming the 90 days trading horizon Wuhan Xianglong Power is expected to under-perform the Huadong Medicine. In addition to that, Wuhan Xianglong is 1.9 times more volatile than Huadong Medicine Co. It trades about -0.25 of its total potential returns per unit of risk. Huadong Medicine Co is currently generating about -0.33 per unit of volatility. If you would invest  3,707  in Huadong Medicine Co on October 12, 2024 and sell it today you would lose (444.00) from holding Huadong Medicine Co or give up 11.98% of portfolio value over 90 days.

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

Wuhan Xianglong Power  vs.  Huadong Medicine Co

Wuhan Xianglong Power

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Wuhan Xianglong Power are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Wuhan Xianglong may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Huadong Medicine

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Wuhan Xianglong and Huadong Medicine

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

The idea behind Wuhan Xianglong Power and Huadong Medicine Co 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.