Correlation Between Cathay Biotech and Wanhua Chemical

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

By analyzing existing cross correlation between Cathay Biotech and Wanhua Chemical Group, you can compare the effects of market volatilities on Cathay Biotech and Wanhua Chemical 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 Wanhua Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Biotech and Wanhua Chemical.

Diversification Opportunities for Cathay Biotech and Wanhua Chemical

0.52

Correlation Coefficient

Cathay Biotech  Wanhua Chemical

Very weak diversification

The 3 months correlation between Cathay and Wanhua is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Biotech and Wanhua Chemical Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wanhua Chemical Group 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 Wanhua Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wanhua Chemical Group has no effect on the direction of Cathay Biotech i.e., Cathay Biotech and Wanhua Chemical go up and down completely randomly.

Pair Corralation between Cathay Biotech and Wanhua Chemical

Assuming the 90 days trading horizon Cathay Biotech is expected to generate 1.66 times more return on investment than Wanhua Chemical. However, Cathay Biotech is 1.66 times more volatile than Wanhua Chemical Group. It trades about 0.12 of its potential returns per unit of risk. Wanhua Chemical Group is currently generating about -0.01 per unit of risk. If you would invest  3,280  in Cathay Biotech on September 22, 2024 and sell it today you would earn a total of  922.00  from holding Cathay Biotech or generate 28.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

Cathay Biotech  vs.  Wanhua Chemical Group

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.

Wanhua Chemical Group

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Cathay Biotech and Wanhua Chemical

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

The idea behind Cathay Biotech and Wanhua Chemical Group 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.