Correlation Between Jiangsu Expressway and Shenzhen Expressway

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

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

Diversification Opportunities for Jiangsu Expressway and Shenzhen Expressway

0.75

Correlation Coefficient

Jiangsu Expressway  Shenzhen Expressway

Poor diversification

The 3 months correlation between Jiangsu and Shenzhen is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Jiangsu Expressway and Shenzhen Expressway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shenzhen Expressway and Jiangsu Expressway 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 Jiangsu Expressway are associated (or correlated) with Shenzhen Expressway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shenzhen Expressway has no effect on the direction of Jiangsu Expressway i.e., Jiangsu Expressway and Shenzhen Expressway go up and down completely randomly.

Pair Corralation between Jiangsu Expressway and Shenzhen Expressway

Assuming the 90 days horizon Jiangsu Expressway is expected to generate 2.34 times more return on investment than Shenzhen Expressway. However, Jiangsu Expressway is 2.34 times more volatile than Shenzhen Expressway. It trades about -0.06 of its potential returns per unit of risk. Shenzhen Expressway is currently generating about -0.17 per unit of risk. If you would invest  113.00  in Jiangsu Expressway on December 30, 2024 and sell it today you would lose (7.00) from holding Jiangsu Expressway or give up 6.19% of portfolio value over 90 days.

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

Jiangsu Expressway  vs.  Shenzhen Expressway

Jiangsu Expressway

Risk-Adjusted Performance

Very Weak

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

Shenzhen Expressway

Risk-Adjusted Performance

Very Weak

Over the last 90 days Shenzhen Expressway has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Jiangsu Expressway and Shenzhen Expressway

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

The idea behind Jiangsu Expressway and Shenzhen Expressway 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.