Correlation Between China International and China State

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

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

Diversification Opportunities for China International and China State

0.78

Correlation Coefficient

China International  China State

Poor diversification

The 3 months correlation between China and China is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding China International Capital and China State Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China State Construction and China International 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 International Capital are associated (or correlated) with China State. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China State Construction has no effect on the direction of China International i.e., China International and China State go up and down completely randomly.

Pair Corralation between China International and China State

Assuming the 90 days trading horizon China International Capital is expected to generate 1.88 times more return on investment than China State. However, China International is 1.88 times more volatile than China State Construction. It trades about 0.03 of its potential returns per unit of risk. China State Construction is currently generating about -0.12 per unit of risk. If you would invest  3,547  in China International Capital on November 29, 2024 and sell it today you would earn a total of  96.00  from holding China International Capital or generate 2.71% return on investment over 90 days.

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

China International Capital  vs.  China State Construction

China International

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China International Capital are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, China International is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

China State Construction

Risk-Adjusted Performance

Very Weak

Over the last 90 days China State Construction 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.

Pair Trading with China International and China State

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

The idea behind China International Capital and China State Construction 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.