Correlation Between China BlueChemical and Arista Networks

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

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

Diversification Opportunities for China BlueChemical and Arista Networks

0.58

Correlation Coefficient

China BlueChemical  Arista Networks

Very weak diversification

The 3 months correlation between China and Arista is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding China BlueChemical and Arista Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arista Networks and China BlueChemical 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 BlueChemical are associated (or correlated) with Arista Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arista Networks has no effect on the direction of China BlueChemical i.e., China BlueChemical and Arista Networks go up and down completely randomly.

Pair Corralation between China BlueChemical and Arista Networks

Assuming the 90 days horizon China BlueChemical is expected to generate 2.89 times less return on investment than Arista Networks. In addition to that, China BlueChemical is 1.2 times more volatile than Arista Networks. It trades about 0.03 of its total potential returns per unit of risk. Arista Networks is currently generating about 0.09 per unit of volatility. If you would invest  3,458  in Arista Networks on December 2, 2024 and sell it today you would earn a total of  7,498  from holding Arista Networks or generate 216.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.22%
Values	Daily Returns

China BlueChemical  vs.  Arista Networks

China BlueChemical

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China BlueChemical are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China BlueChemical reported solid returns over the last few months and may actually be approaching a breakup point.

Arista Networks

Risk-Adjusted Performance

Modest

Over the last 90 days Arista Networks has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly unsteady basic indicators, Arista Networks reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China BlueChemical and Arista Networks

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

The idea behind China BlueChemical and Arista Networks 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 Global Correlations module to find global opportunities by holding instruments from different markets.