Correlation Between China Coal and TerraCom

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

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

Diversification Opportunities for China Coal and TerraCom

0.6

Correlation Coefficient

China Coal  TerraCom

Poor diversification

The 3 months correlation between China and TerraCom is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding China Coal Energy and TerraCom Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TerraCom Limited and China Coal 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 Coal Energy are associated (or correlated) with TerraCom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TerraCom Limited has no effect on the direction of China Coal i.e., China Coal and TerraCom go up and down completely randomly.

Pair Corralation between China Coal and TerraCom

Assuming the 90 days horizon China Coal Energy is expected to generate 0.21 times more return on investment than TerraCom. However, China Coal Energy is 4.86 times less risky than TerraCom. It trades about -0.12 of its potential returns per unit of risk. TerraCom Limited is currently generating about -0.38 per unit of risk. If you would invest  2,590  in China Coal Energy on December 30, 2024 and sell it today you would lose (440.00) from holding China Coal Energy or give up 16.99% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	14.52%
Values	Daily Returns

China Coal Energy  vs.  TerraCom Limited

China Coal Energy

Risk-Adjusted Performance

Very Weak

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

TerraCom Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days TerraCom Limited 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 fundamental indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with China Coal and TerraCom

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

The idea behind China Coal Energy and TerraCom Limited 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.