Correlation Between China Construction and Guangdong Electric

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

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

Diversification Opportunities for China Construction and Guangdong Electric

-0.58

Correlation Coefficient

China Construction  Guangdong Electric

Excellent diversification

The 3 months correlation between China and Guangdong is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Guangdong Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guangdong Electric Power and China Construction 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 Construction Bank are associated (or correlated) with Guangdong Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guangdong Electric Power has no effect on the direction of China Construction i.e., China Construction and Guangdong Electric go up and down completely randomly.

Pair Corralation between China Construction and Guangdong Electric

Assuming the 90 days trading horizon China Construction Bank is expected to generate 1.95 times more return on investment than Guangdong Electric. However, China Construction is 1.95 times more volatile than Guangdong Electric Power. It trades about -0.01 of its potential returns per unit of risk. Guangdong Electric Power is currently generating about -0.16 per unit of risk. If you would invest  855.00  in China Construction Bank on October 12, 2024 and sell it today you would lose (10.00) from holding China Construction Bank or give up 1.17% of portfolio value over 90 days.

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

China Construction Bank  vs.  Guangdong Electric Power

China Construction Bank

Risk-Adjusted Performance

0 of 100

Insignificant

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

Guangdong Electric Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Guangdong Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Guangdong Electric 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 Construction and Guangdong Electric

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

The idea behind China Construction Bank and Guangdong Electric Power 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.