Correlation Between Liaoning Chengda and Lutian Machinery

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

By analyzing existing cross correlation between Liaoning Chengda Biotechnology and Lutian Machinery Co, you can compare the effects of market volatilities on Liaoning Chengda and Lutian Machinery 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 Liaoning Chengda with a short position of Lutian Machinery. Check out your portfolio center. Please also check ongoing floating volatility patterns of Liaoning Chengda and Lutian Machinery.

Diversification Opportunities for Liaoning Chengda and Lutian Machinery

0.41

Correlation Coefficient

Liaoning Chengda  Lutian Machinery

Very weak diversification

The 3 months correlation between Liaoning and Lutian is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Liaoning Chengda Biotechnology and Lutian Machinery Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lutian Machinery and Liaoning Chengda 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 Liaoning Chengda Biotechnology are associated (or correlated) with Lutian Machinery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lutian Machinery has no effect on the direction of Liaoning Chengda i.e., Liaoning Chengda and Lutian Machinery go up and down completely randomly.

Pair Corralation between Liaoning Chengda and Lutian Machinery

Assuming the 90 days trading horizon Liaoning Chengda Biotechnology is expected to under-perform the Lutian Machinery. But the stock apears to be less risky and, when comparing its historical volatility, Liaoning Chengda Biotechnology is 1.59 times less risky than Lutian Machinery. The stock trades about -0.45 of its potential returns per unit of risk. The Lutian Machinery Co is currently generating about -0.19 of returns per unit of risk over similar time horizon. If you would invest  1,580  in Lutian Machinery Co on October 6, 2024 and sell it today you would lose (105.00) from holding Lutian Machinery Co or give up 6.65% of portfolio value over 90 days.

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

Liaoning Chengda Biotechnology  vs.  Lutian Machinery Co

Liaoning Chengda Bio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Liaoning Chengda Biotechnology 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 February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Lutian Machinery

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Liaoning Chengda and Lutian Machinery

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

The idea behind Liaoning Chengda Biotechnology and Lutian Machinery 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.