Correlation Between China Shenhua and PT Adaro

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

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

Diversification Opportunities for China Shenhua and PT Adaro

-0.16

Correlation Coefficient

China Shenhua  PT Adaro

Good diversification

The 3 months correlation between China and A64 is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding China Shenhua Energy and PT Adaro Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PT Adaro Energy and China Shenhua 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 Shenhua Energy are associated (or correlated) with PT Adaro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PT Adaro Energy has no effect on the direction of China Shenhua i.e., China Shenhua and PT Adaro go up and down completely randomly.

Pair Corralation between China Shenhua and PT Adaro

Assuming the 90 days horizon China Shenhua Energy is expected to generate 0.8 times more return on investment than PT Adaro. However, China Shenhua Energy is 1.25 times less risky than PT Adaro. It trades about 0.07 of its potential returns per unit of risk. PT Adaro Energy is currently generating about 0.01 per unit of risk. If you would invest  125.00  in China Shenhua Energy on September 14, 2024 and sell it today you would earn a total of  289.00  from holding China Shenhua Energy or generate 231.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

China Shenhua Energy  vs.  PT Adaro Energy

China Shenhua Energy

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Shenhua Energy are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Shenhua reported solid returns over the last few months and may actually be approaching a breakup point.

PT Adaro Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PT Adaro Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with China Shenhua and PT Adaro

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

The idea behind China Shenhua Energy and PT Adaro Energy 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.