Correlation Between PetroChina and China Railway

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

By analyzing existing cross correlation between PetroChina Co Ltd and China Railway Materials, you can compare the effects of market volatilities on PetroChina and China Railway 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 PetroChina with a short position of China Railway. Check out your portfolio center. Please also check ongoing floating volatility patterns of PetroChina and China Railway.

Diversification Opportunities for PetroChina and China Railway

0.22

Correlation Coefficient

PetroChina  China Railway

Modest diversification

The 3 months correlation between PetroChina and China is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding PetroChina Co Ltd and China Railway Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Materials and PetroChina 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 PetroChina Co Ltd are associated (or correlated) with China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Materials has no effect on the direction of PetroChina i.e., PetroChina and China Railway go up and down completely randomly.

Pair Corralation between PetroChina and China Railway

Assuming the 90 days trading horizon PetroChina Co Ltd is expected to under-perform the China Railway. But the stock apears to be less risky and, when comparing its historical volatility, PetroChina Co Ltd is 1.15 times less risky than China Railway. The stock trades about -0.14 of its potential returns per unit of risk. The China Railway Materials is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  272.00  in China Railway Materials on December 27, 2024 and sell it today you would lose (8.00) from holding China Railway Materials or give up 2.94% of portfolio value over 90 days.

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

PetroChina Co Ltd  vs.  China Railway Materials

PetroChina

Risk-Adjusted Performance

Very Weak

Over the last 90 days PetroChina Co 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.

China Railway Materials

Risk-Adjusted Performance

Very Weak

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

Pair Trading with PetroChina and China Railway

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

The idea behind PetroChina Co Ltd and China Railway Materials 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.