Correlation Between Shanghai Ziyan and Wanhua Chemical

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

By analyzing existing cross correlation between Shanghai Ziyan Foods and Wanhua Chemical Group, you can compare the effects of market volatilities on Shanghai Ziyan and Wanhua Chemical 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 Shanghai Ziyan with a short position of Wanhua Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Ziyan and Wanhua Chemical.

Diversification Opportunities for Shanghai Ziyan and Wanhua Chemical

0.25

Correlation Coefficient

Shanghai Ziyan  Wanhua Chemical

Modest diversification

The 3 months correlation between Shanghai and Wanhua is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Ziyan Foods and Wanhua Chemical Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wanhua Chemical Group and Shanghai Ziyan 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 Shanghai Ziyan Foods are associated (or correlated) with Wanhua Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wanhua Chemical Group has no effect on the direction of Shanghai Ziyan i.e., Shanghai Ziyan and Wanhua Chemical go up and down completely randomly.

Pair Corralation between Shanghai Ziyan and Wanhua Chemical

Assuming the 90 days trading horizon Shanghai Ziyan Foods is expected to generate 1.86 times more return on investment than Wanhua Chemical. However, Shanghai Ziyan is 1.86 times more volatile than Wanhua Chemical Group. It trades about 0.03 of its potential returns per unit of risk. Wanhua Chemical Group is currently generating about -0.07 per unit of risk. If you would invest  1,957  in Shanghai Ziyan Foods on December 26, 2024 and sell it today you would earn a total of  38.00  from holding Shanghai Ziyan Foods or generate 1.94% return on investment over 90 days.

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

Shanghai Ziyan Foods  vs.  Wanhua Chemical Group

Shanghai Ziyan Foods

Risk-Adjusted Performance

Weak

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

Wanhua Chemical Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Wanhua Chemical Group 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 Shanghai Ziyan and Wanhua Chemical

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

The idea behind Shanghai Ziyan Foods and Wanhua Chemical Group 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.