Correlation Between Cathay Biotech and Yunnan Aluminium

Can any of the company-specific risk be diversified away by investing in both Cathay Biotech and Yunnan Aluminium 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 Cathay Biotech and Yunnan Aluminium into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Cathay Biotech and Yunnan Aluminium

0.82

Correlation Coefficient

Cathay Biotech  Yunnan Aluminium

Very poor diversification

The 3 months correlation between Cathay and Yunnan is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Biotech and Yunnan Aluminium Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yunnan Aluminium and Cathay Biotech 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 Cathay Biotech are associated (or correlated) with Yunnan Aluminium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yunnan Aluminium has no effect on the direction of Cathay Biotech i.e., Cathay Biotech and Yunnan Aluminium go up and down completely randomly.

Pair Corralation between Cathay Biotech and Yunnan Aluminium

Assuming the 90 days trading horizon Cathay Biotech is expected to under-perform the Yunnan Aluminium. But the stock apears to be less risky and, when comparing its historical volatility, Cathay Biotech is 1.2 times less risky than Yunnan Aluminium. The stock trades about -0.22 of its potential returns per unit of risk. The Yunnan Aluminium Co is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,394  in Yunnan Aluminium Co on September 20, 2024 and sell it today you would earn a total of  47.00  from holding Yunnan Aluminium Co or generate 3.37% return on investment over 90 days.

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

Cathay Biotech  vs.  Yunnan Aluminium Co

Cathay Biotech

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Biotech are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Cathay Biotech sustained solid returns over the last few months and may actually be approaching a breakup point.

Yunnan Aluminium

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Yunnan Aluminium Co are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Yunnan Aluminium sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cathay Biotech and Yunnan Aluminium

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

The idea behind Cathay Biotech and Yunnan Aluminium 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.

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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.