Correlation Between Lutian Machinery and China Longyuan

Can any of the company-specific risk be diversified away by investing in both Lutian Machinery and China Longyuan 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 Lutian Machinery and China Longyuan into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Lutian Machinery Co and China Longyuan Power, you can compare the effects of market volatilities on Lutian Machinery and China Longyuan 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 Lutian Machinery with a short position of China Longyuan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lutian Machinery and China Longyuan.

Diversification Opportunities for Lutian Machinery and China Longyuan

0.88

Correlation Coefficient

Lutian Machinery  China Longyuan

Very poor diversification

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

Pair Corralation between Lutian Machinery and China Longyuan

Assuming the 90 days trading horizon Lutian Machinery Co is expected to generate 0.8 times more return on investment than China Longyuan. However, Lutian Machinery Co is 1.25 times less risky than China Longyuan. It trades about 0.21 of its potential returns per unit of risk. China Longyuan Power is currently generating about 0.14 per unit of risk. If you would invest  1,215  in Lutian Machinery Co on September 13, 2024 and sell it today you would earn a total of  387.00  from holding Lutian Machinery Co or generate 31.85% return on investment over 90 days.

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

Lutian Machinery Co  vs.  China Longyuan Power

Lutian Machinery

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lutian Machinery Co are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lutian Machinery sustained solid returns over the last few months and may actually be approaching a breakup point.

China Longyuan Power

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Longyuan Power are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Longyuan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lutian Machinery and China Longyuan

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

The idea behind Lutian Machinery Co and China Longyuan Power 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.