Correlation Between China Life and Huasi Agricultural

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

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

Diversification Opportunities for China Life and Huasi Agricultural

0.04

Correlation Coefficient

China Life  Huasi Agricultural

Significant diversification

The 3 months correlation between China and Huasi is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Huasi Agricultural Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Huasi Agricultural and China Life 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 Life Insurance are associated (or correlated) with Huasi Agricultural. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Huasi Agricultural has no effect on the direction of China Life i.e., China Life and Huasi Agricultural go up and down completely randomly.

Pair Corralation between China Life and Huasi Agricultural

Assuming the 90 days trading horizon China Life Insurance is expected to under-perform the Huasi Agricultural. But the stock apears to be less risky and, when comparing its historical volatility, China Life Insurance is 1.25 times less risky than Huasi Agricultural. The stock trades about -0.1 of its potential returns per unit of risk. The Huasi Agricultural Development is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  381.00  in Huasi Agricultural Development on October 5, 2024 and sell it today you would earn a total of  18.00  from holding Huasi Agricultural Development or generate 4.72% return on investment over 90 days.

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

China Life Insurance  vs.  Huasi Agricultural Development

China Life Insurance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Life Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Huasi Agricultural

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Huasi Agricultural Development are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Huasi Agricultural may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with China Life and Huasi Agricultural

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

The idea behind China Life Insurance and Huasi Agricultural Development 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.