Correlation Between China Railway and Air China

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

Diversification Opportunities for China Railway and Air China

-0.03

Correlation Coefficient

China Railway  Air China

Good diversification

The 3 months correlation between China and Air is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Group and Air China Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China 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 Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China has no effect on the direction of China Railway i.e., China Railway and Air China go up and down completely randomly.

Pair Corralation between China Railway and Air China

Assuming the 90 days trading horizon China Railway Group is expected to generate 1.28 times more return on investment than Air China. However, China Railway is 1.28 times more volatile than Air China Ltd. It trades about 0.02 of its potential returns per unit of risk. Air China Ltd is currently generating about -0.03 per unit of risk. If you would invest  577.00  in China Railway Group on October 6, 2024 and sell it today you would earn a total of  26.00  from holding China Railway Group or generate 4.51% return on investment over 90 days.

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

China Railway Group  vs.  Air China Ltd

China Railway Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Railway Group 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.

Air China

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with China Railway and Air China

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

The idea behind China Railway Group and Air China Ltd 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.