Correlation Between KOMATSU and New China

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

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

Diversification Opportunities for KOMATSU and New China

0.71

Correlation Coefficient

KOMATSU  New China

Poor diversification

The 3 months correlation between KOMATSU and New is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding KOMATSU LTD SPONS and New China Life in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New China Life and KOMATSU 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 KOMATSU LTD SPONS are associated (or correlated) with New China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New China Life has no effect on the direction of KOMATSU i.e., KOMATSU and New China go up and down completely randomly.

Pair Corralation between KOMATSU and New China

Assuming the 90 days trading horizon KOMATSU is expected to generate 2.14 times less return on investment than New China. But when comparing it to its historical volatility, KOMATSU LTD SPONS is 2.64 times less risky than New China. It trades about 0.11 of its potential returns per unit of risk. New China Life is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  256.00  in New China Life on September 27, 2024 and sell it today you would earn a total of  32.00  from holding New China Life or generate 12.5% return on investment over 90 days.

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

KOMATSU LTD SPONS  vs.  New China Life

KOMATSU LTD SPONS

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in KOMATSU LTD SPONS are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable primary indicators, KOMATSU is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

New China Life

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in New China Life are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, New China exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with KOMATSU and New China

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

The idea behind KOMATSU LTD SPONS and New China Life 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.