Correlation Between China Everbright and Wuxi Chemical

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

By analyzing existing cross correlation between China Everbright Bank and Wuxi Chemical Equipment, you can compare the effects of market volatilities on China Everbright and Wuxi Chemical 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 Everbright with a short position of Wuxi Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Everbright and Wuxi Chemical.

Diversification Opportunities for China Everbright and Wuxi Chemical

0.34

Correlation Coefficient

China Everbright  Wuxi Chemical

Weak diversification

The 3 months correlation between China and Wuxi is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding China Everbright Bank and Wuxi Chemical Equipment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wuxi Chemical Equipment and China Everbright 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 Everbright Bank are associated (or correlated) with Wuxi Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wuxi Chemical Equipment has no effect on the direction of China Everbright i.e., China Everbright and Wuxi Chemical go up and down completely randomly.

Pair Corralation between China Everbright and Wuxi Chemical

Assuming the 90 days trading horizon China Everbright is expected to generate 2.18 times less return on investment than Wuxi Chemical. But when comparing it to its historical volatility, China Everbright Bank is 1.77 times less risky than Wuxi Chemical. It trades about 0.08 of its potential returns per unit of risk. Wuxi Chemical Equipment is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  3,075  in Wuxi Chemical Equipment on October 25, 2024 and sell it today you would earn a total of  450.00  from holding Wuxi Chemical Equipment or generate 14.63% return on investment over 90 days.

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

China Everbright Bank  vs.  Wuxi Chemical Equipment

China Everbright Bank

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Everbright Bank are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Everbright may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Wuxi Chemical Equipment

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Wuxi Chemical Equipment are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Wuxi Chemical sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Everbright and Wuxi Chemical

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

The idea behind China Everbright Bank and Wuxi Chemical Equipment 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..