Correlation Between Digital China and Digital Realty

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

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

Diversification Opportunities for Digital China and Digital Realty

0.78

Correlation Coefficient

Digital China  Digital Realty

Poor diversification

The 3 months correlation between Digital and Digital is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Digital China Holdings and Digital Realty Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital Realty Trust and Digital China 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 Digital China Holdings are associated (or correlated) with Digital Realty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital Realty Trust has no effect on the direction of Digital China i.e., Digital China and Digital Realty go up and down completely randomly.

Pair Corralation between Digital China and Digital Realty

Assuming the 90 days horizon Digital China Holdings is expected to under-perform the Digital Realty. In addition to that, Digital China is 2.43 times more volatile than Digital Realty Trust. It trades about 0.0 of its total potential returns per unit of risk. Digital Realty Trust is currently generating about 0.17 per unit of volatility. If you would invest  14,150  in Digital Realty Trust on October 7, 2024 and sell it today you would earn a total of  2,752  from holding Digital Realty Trust or generate 19.45% return on investment over 90 days.

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

Digital China Holdings  vs.  Digital Realty Trust

Digital China Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital China Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Digital China is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Digital Realty Trust

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Digital Realty Trust are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Digital Realty reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Digital China and Digital Realty

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

The idea behind Digital China Holdings and Digital Realty Trust 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.