Correlation Between Shanghai Action and Dongfeng Automobile

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

By analyzing existing cross correlation between Shanghai Action Education and Dongfeng Automobile Co, you can compare the effects of market volatilities on Shanghai Action and Dongfeng Automobile 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 Action with a short position of Dongfeng Automobile. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Action and Dongfeng Automobile.

Diversification Opportunities for Shanghai Action and Dongfeng Automobile

0.2

Correlation Coefficient

Shanghai Action  Dongfeng Automobile

Modest diversification

The 3 months correlation between Shanghai and Dongfeng is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Action Education and Dongfeng Automobile Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dongfeng Automobile and Shanghai Action 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 Action Education are associated (or correlated) with Dongfeng Automobile. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dongfeng Automobile has no effect on the direction of Shanghai Action i.e., Shanghai Action and Dongfeng Automobile go up and down completely randomly.

Pair Corralation between Shanghai Action and Dongfeng Automobile

Assuming the 90 days trading horizon Shanghai Action Education is expected to generate 0.77 times more return on investment than Dongfeng Automobile. However, Shanghai Action Education is 1.3 times less risky than Dongfeng Automobile. It trades about 0.2 of its potential returns per unit of risk. Dongfeng Automobile Co is currently generating about -0.02 per unit of risk. If you would invest  3,426  in Shanghai Action Education on December 27, 2024 and sell it today you would earn a total of  851.00  from holding Shanghai Action Education or generate 24.84% return on investment over 90 days.

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

Shanghai Action Education  vs.  Dongfeng Automobile Co

Shanghai Action Education

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Action Education are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Action sustained solid returns over the last few months and may actually be approaching a breakup point.

Dongfeng Automobile

Risk-Adjusted Performance

Very Weak

Over the last 90 days Dongfeng Automobile Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Dongfeng Automobile 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 Action and Dongfeng Automobile

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

The idea behind Shanghai Action Education and Dongfeng Automobile Co 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.