Correlation Between New China and Xilinmen Furniture

Can any of the company-specific risk be diversified away by investing in both New China and Xilinmen Furniture 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 Xilinmen Furniture 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 Xilinmen Furniture Co, you can compare the effects of market volatilities on New China and Xilinmen Furniture 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 Xilinmen Furniture. Check out your portfolio center. Please also check ongoing floating volatility patterns of New China and Xilinmen Furniture.

Diversification Opportunities for New China and Xilinmen Furniture

0.85

Correlation Coefficient

New China  Xilinmen Furniture

Very poor diversification

The 3 months correlation between New and Xilinmen is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding New China Life and Xilinmen Furniture Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xilinmen Furniture 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 Xilinmen Furniture. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xilinmen Furniture has no effect on the direction of New China i.e., New China and Xilinmen Furniture go up and down completely randomly.

Pair Corralation between New China and Xilinmen Furniture

Assuming the 90 days trading horizon New China is expected to generate 1.09 times less return on investment than Xilinmen Furniture. In addition to that, New China is 1.32 times more volatile than Xilinmen Furniture Co. It trades about 0.01 of its total potential returns per unit of risk. Xilinmen Furniture Co is currently generating about 0.02 per unit of volatility. If you would invest  1,721  in Xilinmen Furniture Co on December 26, 2024 and sell it today you would earn a total of  14.00  from holding Xilinmen Furniture Co or generate 0.81% return on investment over 90 days.

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

New China Life  vs.  Xilinmen Furniture Co

New China Life

Risk-Adjusted Performance

Very Weak

Over the last 90 days New China Life has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Xilinmen Furniture

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Xilinmen Furniture Co are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Xilinmen Furniture 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 Xilinmen Furniture

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

The idea behind New China Life and Xilinmen Furniture 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.