Correlation Between Shanghai Material and Baoshan Iron

Can any of the company-specific risk be diversified away by investing in both Shanghai Material and Baoshan Iron 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 Baoshan Iron 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 Baoshan Iron Steel, you can compare the effects of market volatilities on Shanghai Material and Baoshan Iron 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 Baoshan Iron. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Material and Baoshan Iron.

Diversification Opportunities for Shanghai Material and Baoshan Iron

0.14

Correlation Coefficient

Shanghai Material  Baoshan Iron

Average diversification

The 3 months correlation between Shanghai and Baoshan is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Material Trading and Baoshan Iron Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Baoshan Iron Steel 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 Baoshan Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Baoshan Iron Steel has no effect on the direction of Shanghai Material i.e., Shanghai Material and Baoshan Iron go up and down completely randomly.

Pair Corralation between Shanghai Material and Baoshan Iron

Assuming the 90 days trading horizon Shanghai Material Trading is expected to under-perform the Baoshan Iron. In addition to that, Shanghai Material is 2.29 times more volatile than Baoshan Iron Steel. It trades about -0.29 of its total potential returns per unit of risk. Baoshan Iron Steel is currently generating about -0.18 per unit of volatility. If you would invest  699.00  in Baoshan Iron Steel on October 12, 2024 and sell it today you would lose (39.00) from holding Baoshan Iron Steel or give up 5.58% of portfolio value over 90 days.

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

Shanghai Material Trading  vs.  Baoshan Iron Steel

Shanghai Material Trading

Risk-Adjusted Performance

3 of 100

Insignificant

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

Baoshan Iron Steel

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Shanghai Material and Baoshan Iron

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

The idea behind Shanghai Material Trading and Baoshan Iron Steel 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.