Correlation Between Shanghai Rongtai and Shandong Longquan

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

By analyzing existing cross correlation between Shanghai Rongtai Health and Shandong Longquan Pipeline, you can compare the effects of market volatilities on Shanghai Rongtai and Shandong Longquan 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 Rongtai with a short position of Shandong Longquan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Rongtai and Shandong Longquan.

Diversification Opportunities for Shanghai Rongtai and Shandong Longquan

0.8

Correlation Coefficient

Shanghai Rongtai  Shandong Longquan

Very poor diversification

The 3 months correlation between Shanghai and Shandong is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Rongtai Health and Shandong Longquan Pipeline in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Longquan and Shanghai Rongtai 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 Rongtai Health are associated (or correlated) with Shandong Longquan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Longquan has no effect on the direction of Shanghai Rongtai i.e., Shanghai Rongtai and Shandong Longquan go up and down completely randomly.

Pair Corralation between Shanghai Rongtai and Shandong Longquan

Assuming the 90 days trading horizon Shanghai Rongtai Health is expected to under-perform the Shandong Longquan. But the stock apears to be less risky and, when comparing its historical volatility, Shanghai Rongtai Health is 1.15 times less risky than Shandong Longquan. The stock trades about -0.02 of its potential returns per unit of risk. The Shandong Longquan Pipeline is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  437.00  in Shandong Longquan Pipeline on October 4, 2024 and sell it today you would earn a total of  16.00  from holding Shandong Longquan Pipeline or generate 3.66% return on investment over 90 days.

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

Shanghai Rongtai Health  vs.  Shandong Longquan Pipeline

Shanghai Rongtai Health

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shanghai Rongtai Health has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Shanghai Rongtai is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Shandong Longquan

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Shandong Longquan Pipeline are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Shandong Longquan is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Shanghai Rongtai and Shandong Longquan

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

The idea behind Shanghai Rongtai Health and Shandong Longquan Pipeline 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.