Correlation Between Shanghai Material and BYD Co

Can any of the company-specific risk be diversified away by investing in both Shanghai Material and BYD Co 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 Shanghai Material and BYD Co into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Shanghai Material Trading and BYD Co Ltd, you can compare the effects of market volatilities on Shanghai Material and BYD Co 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 Shanghai Material with a short position of BYD Co. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Material and BYD Co.

Diversification Opportunities for Shanghai Material and BYD Co

-0.25

Correlation Coefficient

Shanghai Material  BYD Co

Very good diversification

The 3 months correlation between Shanghai and BYD is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Material Trading and BYD Co Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BYD Co and Shanghai Material 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 Shanghai Material Trading are associated (or correlated) with BYD Co. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BYD Co has no effect on the direction of Shanghai Material i.e., Shanghai Material and BYD Co go up and down completely randomly.

Pair Corralation between Shanghai Material and BYD Co

Assuming the 90 days trading horizon Shanghai Material Trading is expected to under-perform the BYD Co. But the stock apears to be less risky and, when comparing its historical volatility, Shanghai Material Trading is 1.53 times less risky than BYD Co. The stock trades about -0.05 of its potential returns per unit of risk. The BYD Co Ltd is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  28,592  in BYD Co Ltd on December 25, 2024 and sell it today you would earn a total of  8,367  from holding BYD Co Ltd or generate 29.26% return on investment over 90 days.

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

Shanghai Material Trading  vs.  BYD Co Ltd

Shanghai Material Trading

Risk-Adjusted Performance

Very Weak

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

BYD Co

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BYD Co Ltd are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, BYD Co sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Shanghai Material and BYD Co

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

The idea behind Shanghai Material Trading and BYD Co Ltd 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.