Correlation Between Shanghai Electric and Weichai Power

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

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

Diversification Opportunities for Shanghai Electric and Weichai Power

-0.36

Correlation Coefficient

Shanghai Electric  Weichai Power

Very good diversification

The 3 months correlation between Shanghai and Weichai is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Electric Group and Weichai Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Weichai Power and Shanghai Electric 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 Shanghai Electric Group are associated (or correlated) with Weichai Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Weichai Power has no effect on the direction of Shanghai Electric i.e., Shanghai Electric and Weichai Power go up and down completely randomly.

Pair Corralation between Shanghai Electric and Weichai Power

If you would invest  370.00  in Shanghai Electric Group on September 2, 2024 and sell it today you would earn a total of  340.00  from holding Shanghai Electric Group or generate 91.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	1.54%
Values	Daily Returns

Shanghai Electric Group  vs.  Weichai Power

Shanghai Electric

Risk-Adjusted Performance

10 of 100

OK

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

Weichai Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Weichai Power has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, Weichai Power is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Shanghai Electric and Weichai Power

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

The idea behind Shanghai Electric Group and Weichai Power 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.