Correlation Between Shanghai Lingyun and Changchun Faway

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

By analyzing existing cross correlation between Shanghai Lingyun Industries and Changchun Faway Automobile, you can compare the effects of market volatilities on Shanghai Lingyun and Changchun Faway 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 Shanghai Lingyun with a short position of Changchun Faway. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Lingyun and Changchun Faway.

Diversification Opportunities for Shanghai Lingyun and Changchun Faway

0.77

Correlation Coefficient

Shanghai Lingyun  Changchun Faway

Poor diversification

The 3 months correlation between Shanghai and Changchun is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Lingyun Industries and Changchun Faway Automobile in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Changchun Faway Auto and Shanghai Lingyun 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 Shanghai Lingyun Industries are associated (or correlated) with Changchun Faway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Changchun Faway Auto has no effect on the direction of Shanghai Lingyun i.e., Shanghai Lingyun and Changchun Faway go up and down completely randomly.

Pair Corralation between Shanghai Lingyun and Changchun Faway

Assuming the 90 days trading horizon Shanghai Lingyun Industries is expected to under-perform the Changchun Faway. In addition to that, Shanghai Lingyun is 2.19 times more volatile than Changchun Faway Automobile. It trades about -0.14 of its total potential returns per unit of risk. Changchun Faway Automobile is currently generating about -0.01 per unit of volatility. If you would invest  943.00  in Changchun Faway Automobile on November 29, 2024 and sell it today you would lose (17.00) from holding Changchun Faway Automobile or give up 1.8% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.28%
Values	Daily Returns

Shanghai Lingyun Industries  vs.  Changchun Faway Automobile

Shanghai Lingyun Ind

Risk-Adjusted Performance

Very Weak

Over the last 90 days Shanghai Lingyun Industries 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.

Changchun Faway Auto

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Shanghai Lingyun and Changchun Faway

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

The idea behind Shanghai Lingyun Industries and Changchun Faway Automobile 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 Global Correlations module to find global opportunities by holding instruments from different markets.