Correlation Between Lutian Machinery and Chengdu Kanghua

Can any of the company-specific risk be diversified away by investing in both Lutian Machinery and Chengdu Kanghua 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 Chengdu Kanghua 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 Chengdu Kanghua Biological, you can compare the effects of market volatilities on Lutian Machinery and Chengdu Kanghua 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 Chengdu Kanghua. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lutian Machinery and Chengdu Kanghua.

Diversification Opportunities for Lutian Machinery and Chengdu Kanghua

0.76

Correlation Coefficient

Lutian Machinery  Chengdu Kanghua

Poor diversification

The 3 months correlation between Lutian and Chengdu is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Lutian Machinery Co and Chengdu Kanghua Biological in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chengdu Kanghua Biol 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 Chengdu Kanghua. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chengdu Kanghua Biol has no effect on the direction of Lutian Machinery i.e., Lutian Machinery and Chengdu Kanghua go up and down completely randomly.

Pair Corralation between Lutian Machinery and Chengdu Kanghua

Assuming the 90 days trading horizon Lutian Machinery Co is expected to generate 0.75 times more return on investment than Chengdu Kanghua. However, Lutian Machinery Co is 1.33 times less risky than Chengdu Kanghua. It trades about 0.13 of its potential returns per unit of risk. Chengdu Kanghua Biological is currently generating about 0.08 per unit of risk. If you would invest  1,528  in Lutian Machinery Co on December 30, 2024 and sell it today you would earn a total of  191.00  from holding Lutian Machinery Co or generate 12.5% return on investment over 90 days.

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

Lutian Machinery Co  vs.  Chengdu Kanghua Biological

Lutian Machinery

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lutian Machinery Co are ranked lower than 10 (%) 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.

Chengdu Kanghua Biol

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Chengdu Kanghua Biological are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Chengdu Kanghua may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Lutian Machinery and Chengdu Kanghua

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

The idea behind Lutian Machinery Co and Chengdu Kanghua Biological 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..