Correlation Between Industrial Bank and China Railway

Can any of the company-specific risk be diversified away by investing in both Industrial Bank and China Railway 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 Industrial Bank and China Railway into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Industrial Bank Co and China Railway Construction, you can compare the effects of market volatilities on Industrial Bank and China Railway 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 Industrial Bank with a short position of China Railway. Check out your portfolio center. Please also check ongoing floating volatility patterns of Industrial Bank and China Railway.

Diversification Opportunities for Industrial Bank and China Railway

-0.54

Correlation Coefficient

Industrial Bank  China Railway

Excellent diversification

The 3 months correlation between Industrial and China is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Bank Co and China Railway Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Constr and Industrial Bank 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 Industrial Bank Co are associated (or correlated) with China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Constr has no effect on the direction of Industrial Bank i.e., Industrial Bank and China Railway go up and down completely randomly.

Pair Corralation between Industrial Bank and China Railway

Assuming the 90 days trading horizon Industrial Bank is expected to generate 1.23 times less return on investment than China Railway. But when comparing it to its historical volatility, Industrial Bank Co is 1.46 times less risky than China Railway. It trades about 0.02 of its potential returns per unit of risk. China Railway Construction is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  384.00  in China Railway Construction on October 8, 2024 and sell it today you would earn a total of  40.00  from holding China Railway Construction or generate 10.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.79%
Values	Daily Returns

Industrial Bank Co  vs.  China Railway Construction

Industrial Bank

Risk-Adjusted Performance

0 of 100

Very Weak

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

China Railway Constr

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Railway Construction has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Industrial Bank and China Railway

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

The idea behind Industrial Bank Co and China Railway Construction 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.