Correlation Between China Railway and Tonghua Grape

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

Diversification Opportunities for China Railway and Tonghua Grape

0.6

Correlation Coefficient

China Railway  Tonghua Grape

Poor diversification

The 3 months correlation between China and Tonghua is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Group and Tonghua Grape Wine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tonghua Grape Wine 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 Tonghua Grape. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tonghua Grape Wine has no effect on the direction of China Railway i.e., China Railway and Tonghua Grape go up and down completely randomly.

Pair Corralation between China Railway and Tonghua Grape

Assuming the 90 days trading horizon China Railway is expected to generate 12.1 times less return on investment than Tonghua Grape. In addition to that, China Railway is 1.01 times more volatile than Tonghua Grape Wine. It trades about 0.01 of its total potential returns per unit of risk. Tonghua Grape Wine is currently generating about 0.12 per unit of volatility. If you would invest  276.00  in Tonghua Grape Wine on September 1, 2024 and sell it today you would earn a total of  15.00  from holding Tonghua Grape Wine or generate 5.43% 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.  Tonghua Grape Wine

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.

Tonghua Grape Wine

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tonghua Grape Wine are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Tonghua Grape sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and Tonghua Grape

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

The idea behind China Railway Group and Tonghua Grape Wine 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.