Correlation Between Industrial and Air China

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

Diversification Opportunities for Industrial and Air China

-0.64

Correlation Coefficient

Industrial  Air China

Excellent diversification

The 3 months correlation between Industrial and Air is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Industrial and Commercial and Air China Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China 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 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 Industrial i.e., Industrial and Air China go up and down completely randomly.

Pair Corralation between Industrial and Air China

Assuming the 90 days trading horizon Industrial and Commercial is expected to generate 0.69 times more return on investment than Air China. However, Industrial and Commercial is 1.45 times less risky than Air China. It trades about 0.09 of its potential returns per unit of risk. Air China Ltd is currently generating about -0.04 per unit of risk. If you would invest  413.00  in Industrial and Commercial on December 2, 2024 and sell it today you would earn a total of  274.00  from holding Industrial and Commercial or generate 66.34% return on investment over 90 days.

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

Industrial and Commercial  vs.  Air China Ltd

Industrial and Commercial

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial and Commercial are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Industrial sustained solid returns over the last few months and may actually be approaching a breakup point.

Air China

Risk-Adjusted Performance

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 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.

Pair Trading with Industrial and Air China

The main advantage of trading using opposite Industrial and Air China positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Industrial 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 Industrial and Commercial 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.

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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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.