Correlation Between North American and Chongqing Machinery

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

By analyzing existing cross correlation between North American Construction and Chongqing Machinery Electric, you can compare the effects of market volatilities on North American and Chongqing Machinery 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 North American with a short position of Chongqing Machinery. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Chongqing Machinery.

Diversification Opportunities for North American and Chongqing Machinery

0.67

Correlation Coefficient

North American  Chongqing Machinery

Poor diversification

The 3 months correlation between North and Chongqing is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Chongqing Machinery Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chongqing Machinery and North American 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 North American Construction are associated (or correlated) with Chongqing Machinery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chongqing Machinery has no effect on the direction of North American i.e., North American and Chongqing Machinery go up and down completely randomly.

Pair Corralation between North American and Chongqing Machinery

Assuming the 90 days horizon North American is expected to generate 2.96 times less return on investment than Chongqing Machinery. But when comparing it to its historical volatility, North American Construction is 2.15 times less risky than Chongqing Machinery. It trades about 0.05 of its potential returns per unit of risk. Chongqing Machinery Electric is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2.37  in Chongqing Machinery Electric on October 5, 2024 and sell it today you would earn a total of  6.13  from holding Chongqing Machinery Electric or generate 258.65% return on investment over 90 days.

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

North American Construction  vs.  Chongqing Machinery Electric

North American Const

Risk-Adjusted Performance

0 of 100

OK

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

Chongqing Machinery

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Chongqing Machinery Electric has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Chongqing Machinery may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with North American and Chongqing Machinery

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

The idea behind North American Construction and Chongqing Machinery Electric 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.