Correlation Between China Construction and Datang HuaYin

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

Diversification Opportunities for China Construction and Datang HuaYin

0.35

Correlation Coefficient

China Construction  Datang HuaYin

Weak diversification

The 3 months correlation between China and Datang is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Datang HuaYin Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Datang HuaYin Electric 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 Datang HuaYin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Datang HuaYin Electric has no effect on the direction of China Construction i.e., China Construction and Datang HuaYin go up and down completely randomly.

Pair Corralation between China Construction and Datang HuaYin

Assuming the 90 days trading horizon China Construction Bank is expected to under-perform the Datang HuaYin. But the stock apears to be less risky and, when comparing its historical volatility, China Construction Bank is 1.03 times less risky than Datang HuaYin. The stock trades about -0.04 of its potential returns per unit of risk. The Datang HuaYin Electric is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  319.00  in Datang HuaYin Electric on December 30, 2024 and sell it today you would earn a total of  1.00  from holding Datang HuaYin Electric or generate 0.31% return on investment over 90 days.

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

China Construction Bank  vs.  Datang HuaYin Electric

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.

Datang HuaYin Electric

Risk-Adjusted Performance

Very Weak

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

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

The idea behind China Construction Bank and Datang HuaYin Electric 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.