Correlation Between China Railway and Ningbo Tech

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

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

Diversification Opportunities for China Railway and Ningbo Tech

0.7

Correlation Coefficient

China Railway  Ningbo Tech

Poor diversification

The 3 months correlation between China and Ningbo is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Group and Ningbo Tech Bank Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ningbo Tech Bank and China Railway 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 China Railway Group are associated (or correlated) with Ningbo Tech. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ningbo Tech Bank has no effect on the direction of China Railway i.e., China Railway and Ningbo Tech go up and down completely randomly.

Pair Corralation between China Railway and Ningbo Tech

Assuming the 90 days trading horizon China Railway is expected to generate 1.72 times less return on investment than Ningbo Tech. In addition to that, China Railway is 1.02 times more volatile than Ningbo Tech Bank Co. It trades about 0.11 of its total potential returns per unit of risk. Ningbo Tech Bank Co is currently generating about 0.19 per unit of volatility. If you would invest  239.00  in Ningbo Tech Bank Co on August 31, 2024 and sell it today you would earn a total of  79.00  from holding Ningbo Tech Bank Co or generate 33.05% return on investment over 90 days.

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

China Railway Group  vs.  Ningbo Tech Bank Co

China Railway Group

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Group are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Railway sustained solid returns over the last few months and may actually be approaching a breakup point.

Ningbo Tech Bank

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ningbo Tech Bank Co are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ningbo Tech sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and Ningbo Tech

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

The idea behind China Railway Group and Ningbo Tech Bank 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.