Correlation Between Spirent Communications and China Water

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

By analyzing existing cross correlation between Spirent Communications plc and China Water Affairs, you can compare the effects of market volatilities on Spirent Communications and China Water 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 Spirent Communications with a short position of China Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Spirent Communications and China Water.

Diversification Opportunities for Spirent Communications and China Water

0.3

Correlation Coefficient

Spirent Communications  China Water

Weak diversification

The 3 months correlation between Spirent and China is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Spirent Communications plc and China Water Affairs in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Water Affairs and Spirent Communications 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 Spirent Communications plc are associated (or correlated) with China Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Water Affairs has no effect on the direction of Spirent Communications i.e., Spirent Communications and China Water go up and down completely randomly.

Pair Corralation between Spirent Communications and China Water

Assuming the 90 days horizon Spirent Communications is expected to generate 25.58 times less return on investment than China Water. In addition to that, Spirent Communications is 1.07 times more volatile than China Water Affairs. It trades about 0.0 of its total potential returns per unit of risk. China Water Affairs is currently generating about 0.06 per unit of volatility. If you would invest  25.00  in China Water Affairs on October 4, 2024 and sell it today you would earn a total of  38.00  from holding China Water Affairs or generate 152.0% return on investment over 90 days.

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

Spirent Communications plc  vs.  China Water Affairs

Spirent Communications

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Spirent Communications plc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Spirent Communications may actually be approaching a critical reversion point that can send shares even higher in February 2025.

China Water Affairs

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Water Affairs are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental drivers, China Water is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Spirent Communications and China Water

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

The idea behind Spirent Communications plc and China Water Affairs 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.