Correlation Between NetEase and SohuCom

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

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

Diversification Opportunities for NetEase and SohuCom

0.4

Correlation Coefficient

NetEase  SohuCom

Very weak diversification

The 3 months correlation between NetEase and SohuCom is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding NetEase and SohuCom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SohuCom and NetEase 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 NetEase are associated (or correlated) with SohuCom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SohuCom has no effect on the direction of NetEase i.e., NetEase and SohuCom go up and down completely randomly.

Pair Corralation between NetEase and SohuCom

Given the investment horizon of 90 days NetEase is expected to generate 0.83 times more return on investment than SohuCom. However, NetEase is 1.21 times less risky than SohuCom. It trades about 0.1 of its potential returns per unit of risk. SohuCom is currently generating about 0.01 per unit of risk. If you would invest  8,925  in NetEase on December 30, 2024 and sell it today you would earn a total of  1,147  from holding NetEase or generate 12.85% return on investment over 90 days.

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

NetEase  vs.  SohuCom

NetEase

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NetEase are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, NetEase unveiled solid returns over the last few months and may actually be approaching a breakup point.

SohuCom

Risk-Adjusted Performance

Weak

Over the last 90 days SohuCom has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical indicators, SohuCom is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with NetEase and SohuCom

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

The idea behind NetEase and SohuCom 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.