Correlation Between Reliance Industries and China Construction

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

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

Diversification Opportunities for Reliance Industries and China Construction

-0.27

Correlation Coefficient

Reliance Industries  China Construction

Very good diversification

The 3 months correlation between Reliance and China is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Industries Limited and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank and Reliance Industries 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 Reliance Industries Limited are associated (or correlated) with China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Reliance Industries i.e., Reliance Industries and China Construction go up and down completely randomly.

Pair Corralation between Reliance Industries and China Construction

Assuming the 90 days horizon Reliance Industries Limited is expected to under-perform the China Construction. But the stock apears to be less risky and, when comparing its historical volatility, Reliance Industries Limited is 8.88 times less risky than China Construction. The stock trades about -0.43 of its potential returns per unit of risk. The China Construction Bank is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  54.00  in China Construction Bank on October 5, 2024 and sell it today you would earn a total of  22.00  from holding China Construction Bank or generate 40.74% return on investment over 90 days.

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

Reliance Industries Limited  vs.  China Construction Bank

Reliance Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Reliance Industries Limited 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.

China Construction Bank

Risk-Adjusted Performance

0 of 100

Good

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

Pair Trading with Reliance Industries and China Construction

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

The idea behind Reliance Industries Limited and China Construction Bank 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.