Correlation Between China Water and Guangdong Investment

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

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

Diversification Opportunities for China Water and Guangdong Investment

0.37

Correlation Coefficient

China Water  Guangdong Investment

Weak diversification

The 3 months correlation between China and Guangdong is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding China Water Affairs and Guangdong Investment Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guangdong Investment and China Water 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 Water Affairs are associated (or correlated) with Guangdong Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guangdong Investment has no effect on the direction of China Water i.e., China Water and Guangdong Investment go up and down completely randomly.

Pair Corralation between China Water and Guangdong Investment

Assuming the 90 days trading horizon China Water is expected to generate 2.31 times less return on investment than Guangdong Investment. But when comparing it to its historical volatility, China Water Affairs is 1.14 times less risky than Guangdong Investment. It trades about 0.11 of its potential returns per unit of risk. Guangdong Investment Limited is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  26.00  in Guangdong Investment Limited on September 21, 2024 and sell it today you would earn a total of  48.00  from holding Guangdong Investment Limited or generate 184.62% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.85%
Values	Daily Returns

China Water Affairs  vs.  Guangdong Investment Limited

China Water Affairs

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Water Affairs are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental drivers, China Water reported solid returns over the last few months and may actually be approaching a breakup point.

Guangdong Investment

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Guangdong Investment Limited are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Guangdong Investment reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Water and Guangdong Investment

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

The idea behind China Water Affairs and Guangdong Investment 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.