Correlation Between China Natural and China Automotive

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

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

Diversification Opportunities for China Natural and China Automotive

-0.35

Correlation Coefficient

China Natural  China Automotive

Very good diversification

The 3 months correlation between China and China is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding China Natural Resources and China Automotive Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Automotive Systems and China Natural 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 Natural Resources are associated (or correlated) with China Automotive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Automotive Systems has no effect on the direction of China Natural i.e., China Natural and China Automotive go up and down completely randomly.

Pair Corralation between China Natural and China Automotive

Given the investment horizon of 90 days China Natural Resources is expected to under-perform the China Automotive. In addition to that, China Natural is 2.13 times more volatile than China Automotive Systems. It trades about 0.0 of its total potential returns per unit of risk. China Automotive Systems is currently generating about 0.19 per unit of volatility. If you would invest  409.00  in China Automotive Systems on December 28, 2024 and sell it today you would earn a total of  117.00  from holding China Automotive Systems or generate 28.61% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

China Natural Resources  vs.  China Automotive Systems

China Natural Resources

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Natural Resources has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, China Natural is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

China Automotive Systems

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Automotive Systems are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, China Automotive unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Natural and China Automotive

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

The idea behind China Natural Resources and China Automotive Systems 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.