Correlation Between China Shenhua and PT Bumi

Can any of the company-specific risk be diversified away by investing in both China Shenhua and PT Bumi 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 Bumi 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 Bumi Resources, you can compare the effects of market volatilities on China Shenhua and PT Bumi 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 Bumi. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Shenhua and PT Bumi.

Diversification Opportunities for China Shenhua and PT Bumi

0.55

Correlation Coefficient

China Shenhua  PT Bumi

Very weak diversification

The 3 months correlation between China and PJM is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding China Shenhua Energy and PT Bumi Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PT Bumi Resources 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 Bumi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PT Bumi Resources has no effect on the direction of China Shenhua i.e., China Shenhua and PT Bumi go up and down completely randomly.

Pair Corralation between China Shenhua and PT Bumi

Assuming the 90 days horizon China Shenhua is expected to generate 2.81 times less return on investment than PT Bumi. But when comparing it to its historical volatility, China Shenhua Energy is 1.95 times less risky than PT Bumi. It trades about 0.1 of its potential returns per unit of risk. PT Bumi Resources is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  0.50  in PT Bumi Resources on September 14, 2024 and sell it today you would earn a total of  0.30  from holding PT Bumi Resources or generate 60.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

China Shenhua Energy  vs.  PT Bumi Resources

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 Bumi Resources

Risk-Adjusted Performance

11 of 100

Good

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

Pair Trading with China Shenhua and PT Bumi

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

The idea behind China Shenhua Energy and PT Bumi Resources 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.