Correlation Between Lutian Machinery and Ningbo Fangzheng

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

Diversification Opportunities for Lutian Machinery and Ningbo Fangzheng

0.5

Correlation Coefficient

Lutian Machinery  Ningbo Fangzheng

Very weak diversification

The 3 months correlation between Lutian and Ningbo is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Lutian Machinery Co and Ningbo Fangzheng Automobile in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ningbo Fangzheng Aut 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 Ningbo Fangzheng. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ningbo Fangzheng Aut has no effect on the direction of Lutian Machinery i.e., Lutian Machinery and Ningbo Fangzheng go up and down completely randomly.

Pair Corralation between Lutian Machinery and Ningbo Fangzheng

Assuming the 90 days trading horizon Lutian Machinery is expected to generate 3.3 times less return on investment than Ningbo Fangzheng. But when comparing it to its historical volatility, Lutian Machinery Co is 1.75 times less risky than Ningbo Fangzheng. It trades about 0.0 of its potential returns per unit of risk. Ningbo Fangzheng Automobile is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,644  in Ningbo Fangzheng Automobile on December 2, 2024 and sell it today you would lose (14.00) from holding Ningbo Fangzheng Automobile or give up 0.85% of portfolio value over 90 days.

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

Lutian Machinery Co  vs.  Ningbo Fangzheng Automobile

Lutian Machinery

Risk-Adjusted Performance

Very Weak

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

Ningbo Fangzheng Aut

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Lutian Machinery and Ningbo Fangzheng

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

The idea behind Lutian Machinery Co and Ningbo Fangzheng Automobile 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.