Correlation Between Industrial and Shanghai Construction

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

By analyzing existing cross correlation between Industrial and Commercial and Shanghai Construction Group, you can compare the effects of market volatilities on Industrial and Shanghai Construction 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 Industrial with a short position of Shanghai Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Industrial and Shanghai Construction.

Diversification Opportunities for Industrial and Shanghai Construction

0.21

Correlation Coefficient

Industrial  Shanghai Construction

Modest diversification

The 3 months correlation between Industrial and Shanghai is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Industrial and Commercial and Shanghai Construction Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Construction and Industrial 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 Industrial and Commercial are associated (or correlated) with Shanghai Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Construction has no effect on the direction of Industrial i.e., Industrial and Shanghai Construction go up and down completely randomly.

Pair Corralation between Industrial and Shanghai Construction

Assuming the 90 days trading horizon Industrial and Commercial is expected to generate 0.76 times more return on investment than Shanghai Construction. However, Industrial and Commercial is 1.32 times less risky than Shanghai Construction. It trades about 0.16 of its potential returns per unit of risk. Shanghai Construction Group is currently generating about -0.27 per unit of risk. If you would invest  642.00  in Industrial and Commercial on October 11, 2024 and sell it today you would earn a total of  34.00  from holding Industrial and Commercial or generate 5.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Industrial and Commercial  vs.  Shanghai Construction Group

Industrial and Commercial

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial and Commercial are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Industrial may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Shanghai Construction

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Construction Group are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Construction may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Industrial and Shanghai Construction

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

The idea behind Industrial and Commercial and Shanghai Construction Group 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.