Correlation Between China Construction and Shanghai Newtouch

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

Diversification Opportunities for China Construction and Shanghai Newtouch

0.38

Correlation Coefficient

China Construction  Shanghai Newtouch

Weak diversification

The 3 months correlation between China and Shanghai is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Shanghai Newtouch Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Newtouch 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 Shanghai Newtouch. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Newtouch has no effect on the direction of China Construction i.e., China Construction and Shanghai Newtouch go up and down completely randomly.

Pair Corralation between China Construction and Shanghai Newtouch

Assuming the 90 days trading horizon China Construction Bank is expected to under-perform the Shanghai Newtouch. But the stock apears to be less risky and, when comparing its historical volatility, China Construction Bank is 4.93 times less risky than Shanghai Newtouch. The stock trades about -0.04 of its potential returns per unit of risk. The Shanghai Newtouch Software is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,803  in Shanghai Newtouch Software on December 25, 2024 and sell it today you would earn a total of  244.00  from holding Shanghai Newtouch Software or generate 13.53% 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.  Shanghai Newtouch Software

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.

Shanghai Newtouch

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Newtouch Software are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Newtouch sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Construction and Shanghai Newtouch

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

The idea behind China Construction Bank and Shanghai Newtouch Software 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.