Correlation Between Fast Retailing and China Southern

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

By analyzing existing cross correlation between Fast Retailing Co and China Southern Airlines, you can compare the effects of market volatilities on Fast Retailing and China Southern 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 Fast Retailing with a short position of China Southern. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fast Retailing and China Southern.

Diversification Opportunities for Fast Retailing and China Southern

0.53

Correlation Coefficient

Fast Retailing  China Southern

Very weak diversification

The 3 months correlation between Fast and China is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Fast Retailing Co and China Southern Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Southern Airlines and Fast Retailing 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 Fast Retailing Co are associated (or correlated) with China Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Southern Airlines has no effect on the direction of Fast Retailing i.e., Fast Retailing and China Southern go up and down completely randomly.

Pair Corralation between Fast Retailing and China Southern

Assuming the 90 days trading horizon Fast Retailing Co is expected to under-perform the China Southern. But the stock apears to be less risky and, when comparing its historical volatility, Fast Retailing Co is 1.65 times less risky than China Southern. The stock trades about -0.07 of its potential returns per unit of risk. The China Southern Airlines is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  45.00  in China Southern Airlines on November 29, 2024 and sell it today you would lose (3.00) from holding China Southern Airlines or give up 6.67% of portfolio value over 90 days.

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

Fast Retailing Co  vs.  China Southern Airlines

Fast Retailing

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fast Retailing Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

China Southern Airlines

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Fast Retailing and China Southern

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

The idea behind Fast Retailing Co and China Southern Airlines 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.