Correlation Between China Pacific and Hua Hong

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

By analyzing existing cross correlation between China Pacific Insurance and Hua Hong Semiconductor, you can compare the effects of market volatilities on China Pacific and Hua Hong 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 Pacific with a short position of Hua Hong. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Pacific and Hua Hong.

Diversification Opportunities for China Pacific and Hua Hong

0.01

Correlation Coefficient

China Pacific  Hua Hong

Significant diversification

The 3 months correlation between China and Hua is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding China Pacific Insurance and Hua Hong Semiconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hua Hong Semiconductor and China Pacific 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 Pacific Insurance are associated (or correlated) with Hua Hong. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hua Hong Semiconductor has no effect on the direction of China Pacific i.e., China Pacific and Hua Hong go up and down completely randomly.

Pair Corralation between China Pacific and Hua Hong

Assuming the 90 days trading horizon China Pacific Insurance is expected to under-perform the Hua Hong. But the stock apears to be less risky and, when comparing its historical volatility, China Pacific Insurance is 1.95 times less risky than Hua Hong. The stock trades about -0.04 of its potential returns per unit of risk. The Hua Hong Semiconductor is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  4,955  in Hua Hong Semiconductor on December 25, 2024 and sell it today you would lose (85.00) from holding Hua Hong Semiconductor or give up 1.72% of portfolio value over 90 days.

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

China Pacific Insurance  vs.  Hua Hong Semiconductor

China Pacific Insurance

Risk-Adjusted Performance

Very Weak

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

Hua Hong Semiconductor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Hua Hong Semiconductor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Hua Hong 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 Pacific and Hua Hong

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

The idea behind China Pacific Insurance and Hua Hong Semiconductor 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.