Correlation Between Shanghai Shuixing and Chongqing VDL

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

By analyzing existing cross correlation between Shanghai Shuixing Home and Chongqing VDL Electronics, you can compare the effects of market volatilities on Shanghai Shuixing and Chongqing VDL 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 Shuixing with a short position of Chongqing VDL. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Shuixing and Chongqing VDL.

Diversification Opportunities for Shanghai Shuixing and Chongqing VDL

0.48

Correlation Coefficient

Shanghai Shuixing  Chongqing VDL

Very weak diversification

The 3 months correlation between Shanghai and Chongqing is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Shuixing Home and Chongqing VDL Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chongqing VDL Electronics and Shanghai Shuixing 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 Shuixing Home are associated (or correlated) with Chongqing VDL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chongqing VDL Electronics has no effect on the direction of Shanghai Shuixing i.e., Shanghai Shuixing and Chongqing VDL go up and down completely randomly.

Pair Corralation between Shanghai Shuixing and Chongqing VDL

Assuming the 90 days trading horizon Shanghai Shuixing Home is expected to under-perform the Chongqing VDL. But the stock apears to be less risky and, when comparing its historical volatility, Shanghai Shuixing Home is 1.26 times less risky than Chongqing VDL. The stock trades about -0.11 of its potential returns per unit of risk. The Chongqing VDL Electronics is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  5,049  in Chongqing VDL Electronics on October 15, 2024 and sell it today you would lose (209.00) from holding Chongqing VDL Electronics or give up 4.14% of portfolio value over 90 days.

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

Shanghai Shuixing Home  vs.  Chongqing VDL Electronics

Shanghai Shuixing Home

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Shuixing Home are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Shuixing sustained solid returns over the last few months and may actually be approaching a breakup point.

Chongqing VDL Electronics

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Chongqing VDL Electronics are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Chongqing VDL sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Shanghai Shuixing and Chongqing VDL

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

The idea behind Shanghai Shuixing Home and Chongqing VDL Electronics 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.