Correlation Between New China and Transportadora

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

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

Diversification Opportunities for New China and Transportadora

0.67

Correlation Coefficient

New China  Transportadora

Poor diversification

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

Pair Corralation between New China and Transportadora

Assuming the 90 days trading horizon New China is expected to generate 1.72 times less return on investment than Transportadora. In addition to that, New China is 1.2 times more volatile than Transportadora de Gas. It trades about 0.09 of its total potential returns per unit of risk. Transportadora de Gas is currently generating about 0.19 per unit of volatility. If you would invest  1,690  in Transportadora de Gas on September 29, 2024 and sell it today you would earn a total of  1,050  from holding Transportadora de Gas or generate 62.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.41%
Values	Daily Returns

New China Life  vs.  Transportadora de Gas

New China Life

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in New China Life are ranked lower than 7 (%) 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.

Transportadora de Gas

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Transportadora de Gas are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain forward-looking signals, Transportadora reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with New China and Transportadora

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

The idea behind New China Life and Transportadora de Gas 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.