Correlation Between Shuhua Sports and Huadong Medicine

Can any of the company-specific risk be diversified away by investing in both Shuhua Sports and Huadong Medicine 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 Shuhua Sports and Huadong Medicine into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Shuhua Sports Co and Huadong Medicine Co, you can compare the effects of market volatilities on Shuhua Sports and Huadong Medicine 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 Shuhua Sports with a short position of Huadong Medicine. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shuhua Sports and Huadong Medicine.

Diversification Opportunities for Shuhua Sports and Huadong Medicine

0.33

Correlation Coefficient

Shuhua Sports  Huadong Medicine

Weak diversification

The 3 months correlation between Shuhua and Huadong is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Shuhua Sports Co and Huadong Medicine Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Huadong Medicine and Shuhua Sports 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 Shuhua Sports Co are associated (or correlated) with Huadong Medicine. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Huadong Medicine has no effect on the direction of Shuhua Sports i.e., Shuhua Sports and Huadong Medicine go up and down completely randomly.

Pair Corralation between Shuhua Sports and Huadong Medicine

Assuming the 90 days trading horizon Shuhua Sports Co is expected to generate 2.3 times more return on investment than Huadong Medicine. However, Shuhua Sports is 2.3 times more volatile than Huadong Medicine Co. It trades about -0.01 of its potential returns per unit of risk. Huadong Medicine Co is currently generating about -0.23 per unit of risk. If you would invest  856.00  in Shuhua Sports Co on October 21, 2024 and sell it today you would lose (18.00) from holding Shuhua Sports Co or give up 2.1% of portfolio value over 90 days.

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

Shuhua Sports Co  vs.  Huadong Medicine Co

Shuhua Sports

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shuhua Sports Co are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shuhua Sports sustained solid returns over the last few months and may actually be approaching a breakup point.

Huadong Medicine

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Shuhua Sports and Huadong Medicine

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

The idea behind Shuhua Sports Co and Huadong Medicine 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.