Correlation Between Shanghai Rongtai and Shandong Huifa

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

Diversification Opportunities for Shanghai Rongtai and Shandong Huifa

0.88

Correlation Coefficient

Shanghai Rongtai  Shandong Huifa

Very poor diversification

The 3 months correlation between Shanghai and Shandong is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Rongtai Health and Shandong Huifa Foodstuff in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Huifa Foodstuff 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 Huifa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Huifa Foodstuff has no effect on the direction of Shanghai Rongtai i.e., Shanghai Rongtai and Shandong Huifa go up and down completely randomly.

Pair Corralation between Shanghai Rongtai and Shandong Huifa

Assuming the 90 days trading horizon Shanghai Rongtai Health is expected to under-perform the Shandong Huifa. But the stock apears to be less risky and, when comparing its historical volatility, Shanghai Rongtai Health is 1.56 times less risky than Shandong Huifa. The stock trades about -0.02 of its potential returns per unit of risk. The Shandong Huifa Foodstuff is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  681.00  in Shandong Huifa Foodstuff on October 6, 2024 and sell it today you would earn a total of  426.00  from holding Shandong Huifa Foodstuff or generate 62.56% 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 Huifa Foodstuff

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 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.

Shandong Huifa Foodstuff

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Shandong Huifa Foodstuff are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shandong Huifa sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Shanghai Rongtai and Shandong Huifa

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

The idea behind Shanghai Rongtai Health and Shandong Huifa Foodstuff 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..