Correlation Between China Construction and Connecticut Light

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

By analyzing existing cross correlation between China Construction Bank and The Connecticut Light, you can compare the effects of market volatilities on China Construction and Connecticut Light 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 Construction with a short position of Connecticut Light. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Construction and Connecticut Light.

Diversification Opportunities for China Construction and Connecticut Light

-0.29

Correlation Coefficient

China Construction  Connecticut Light

Very good diversification

The 3 months correlation between China and Connecticut is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and The Connecticut Light in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Connecticut Light and China Construction 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 Construction Bank are associated (or correlated) with Connecticut Light. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Connecticut Light has no effect on the direction of China Construction i.e., China Construction and Connecticut Light go up and down completely randomly.

Pair Corralation between China Construction and Connecticut Light

Assuming the 90 days horizon China Construction Bank is expected to generate 3.06 times more return on investment than Connecticut Light. However, China Construction is 3.06 times more volatile than The Connecticut Light. It trades about 0.01 of its potential returns per unit of risk. The Connecticut Light is currently generating about -0.02 per unit of risk. If you would invest  78.00  in China Construction Bank on October 11, 2024 and sell it today you would lose (1.00) from holding China Construction Bank or give up 1.28% of portfolio value over 90 days.

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

China Construction Bank  vs.  The Connecticut Light

China Construction Bank

Risk-Adjusted Performance

1 of 100

Weak

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

Connecticut Light

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Connecticut Light has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Connecticut Light is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with China Construction and Connecticut Light

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

The idea behind China Construction Bank and The Connecticut Light 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.

Check out your portfolio center.

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.