Correlation Between New China and TongFu Microelectronics

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

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

Diversification Opportunities for New China and TongFu Microelectronics

0.42

Correlation Coefficient

New China  TongFu Microelectronics

Very weak diversification

The 3 months correlation between New and TongFu is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding New China Life and TongFu Microelectronics Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TongFu Microelectronics and New China 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 New China Life are associated (or correlated) with TongFu Microelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TongFu Microelectronics has no effect on the direction of New China i.e., New China and TongFu Microelectronics go up and down completely randomly.

Pair Corralation between New China and TongFu Microelectronics

Assuming the 90 days trading horizon New China Life is expected to generate 0.95 times more return on investment than TongFu Microelectronics. However, New China Life is 1.05 times less risky than TongFu Microelectronics. It trades about 0.02 of its potential returns per unit of risk. TongFu Microelectronics Co is currently generating about -0.04 per unit of risk. If you would invest  5,109  in New China Life on December 24, 2024 and sell it today you would earn a total of  39.00  from holding New China Life or generate 0.76% return on investment over 90 days.

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

New China Life  vs.  TongFu Microelectronics Co

New China Life

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in New China Life are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, New China is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

TongFu Microelectronics

Risk-Adjusted Performance

Very Weak

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

Pair Trading with New China and TongFu Microelectronics

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

The idea behind New China Life and TongFu Microelectronics 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.