Correlation Between China Construction and China National

Can any of the company-specific risk be diversified away by investing in both China Construction and China National 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 China National 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 China National Medicines, you can compare the effects of market volatilities on China Construction and China National 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 China National. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Construction and China National.

Diversification Opportunities for China Construction and China National

0.33

Correlation Coefficient

China Construction  China National

Weak diversification

The 3 months correlation between China and China is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and China National Medicines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China National Medicines 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 China National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China National Medicines has no effect on the direction of China Construction i.e., China Construction and China National go up and down completely randomly.

Pair Corralation between China Construction and China National

Assuming the 90 days trading horizon China Construction Bank is expected to generate 0.87 times more return on investment than China National. However, China Construction Bank is 1.15 times less risky than China National. It trades about -0.04 of its potential returns per unit of risk. China National Medicines is currently generating about -0.18 per unit of risk. If you would invest  878.00  in China Construction Bank on December 24, 2024 and sell it today you would lose (29.00) from holding China Construction Bank or give up 3.3% of portfolio value over 90 days.

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

China Construction Bank  vs.  China National Medicines

China Construction Bank

Risk-Adjusted Performance

Very Weak

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.

China National Medicines

Risk-Adjusted Performance

Very Weak

Over the last 90 days China National Medicines 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 April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with China Construction and China National

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

The idea behind China Construction Bank and China National Medicines 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..