Correlation Between China National and New China

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

By analyzing existing cross correlation between China National Electric and New China Life, you can compare the effects of market volatilities on China National and New China 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 China National with a short position of New China. Check out your portfolio center. Please also check ongoing floating volatility patterns of China National and New China.

Diversification Opportunities for China National and New China

0.61

Correlation Coefficient

China National  New China

Poor diversification

The 3 months correlation between China and New is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding China National Electric and New China Life in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New China Life and China National 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 China National Electric are associated (or correlated) with New China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New China Life has no effect on the direction of China National i.e., China National and New China go up and down completely randomly.

Pair Corralation between China National and New China

Assuming the 90 days trading horizon China National Electric is expected to generate 0.78 times more return on investment than New China. However, China National Electric is 1.28 times less risky than New China. It trades about 0.05 of its potential returns per unit of risk. New China Life is currently generating about 0.0 per unit of risk. If you would invest  2,180  in China National Electric on December 24, 2024 and sell it today you would earn a total of  106.00  from holding China National Electric or generate 4.86% return on investment over 90 days.

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

China National Electric  vs.  New China Life

China National Electric

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China National Electric are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China National may actually be approaching a critical reversion point that can send shares even higher in April 2025.

New China Life

Risk-Adjusted Performance

Very Weak

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

Pair Trading with China National and New China

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

The idea behind China National Electric and New China Life 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.