Correlation Between China Railway and Long Yuan

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

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

Diversification Opportunities for China Railway and Long Yuan

0.82

Correlation Coefficient

China Railway  Long Yuan

Very poor diversification

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

Pair Corralation between China Railway and Long Yuan

Assuming the 90 days trading horizon China Railway Construction is expected to under-perform the Long Yuan. But the stock apears to be less risky and, when comparing its historical volatility, China Railway Construction is 2.99 times less risky than Long Yuan. The stock trades about -0.05 of its potential returns per unit of risk. The Long Yuan Construction is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  359.00  in Long Yuan Construction on November 19, 2024 and sell it today you would earn a total of  23.00  from holding Long Yuan Construction or generate 6.41% return on investment over 90 days.

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

China Railway Construction  vs.  Long Yuan Construction

China Railway Constr

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Railway Construction has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Long Yuan Construction

Risk-Adjusted Performance

Very Weak

Over the last 90 days Long Yuan Construction has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Long Yuan 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 Railway and Long Yuan

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

The idea behind China Railway Construction and Long Yuan Construction 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.