Correlation Between China Railway and China Energy

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

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

Diversification Opportunities for China Railway and China Energy

0.93

Correlation Coefficient

China Railway  China Energy

Almost no diversification

The 3 months correlation between China and China is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Group and China Energy Engineering in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Energy Engineering and China Railway 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 Railway Group are associated (or correlated) with China Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Energy Engineering has no effect on the direction of China Railway i.e., China Railway and China Energy go up and down completely randomly.

Pair Corralation between China Railway and China Energy

Assuming the 90 days horizon China Railway is expected to generate 1.76 times less return on investment than China Energy. But when comparing it to its historical volatility, China Railway Group is 1.12 times less risky than China Energy. It trades about 0.1 of its potential returns per unit of risk. China Energy Engineering is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  7.92  in China Energy Engineering on September 4, 2024 and sell it today you would earn a total of  4.08  from holding China Energy Engineering or generate 51.52% return on investment over 90 days.

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

China Railway Group  vs.  China Energy Engineering

China Railway Group

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Group are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Railway reported solid returns over the last few months and may actually be approaching a breakup point.

China Energy Engineering

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Energy Engineering are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Railway and China Energy

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

The idea behind China Railway Group and China Energy Engineering 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..