Correlation Between Johnson Controls and China Energy

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

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

Diversification Opportunities for Johnson Controls and China Energy

0.37

Correlation Coefficient

Johnson Controls  China Energy

Weak diversification

The 3 months correlation between Johnson and China is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Controls International and China Energy Engineering in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Energy Engineering and Johnson Controls 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 Johnson Controls International are associated (or correlated) with China Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Energy Engineering has no effect on the direction of Johnson Controls i.e., Johnson Controls and China Energy go up and down completely randomly.

Pair Corralation between Johnson Controls and China Energy

Assuming the 90 days trading horizon Johnson Controls International is expected to under-perform the China Energy. But the stock apears to be less risky and, when comparing its historical volatility, Johnson Controls International is 4.53 times less risky than China Energy. The stock trades about -0.24 of its potential returns per unit of risk. The China Energy Engineering is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  10.00  in China Energy Engineering on September 23, 2024 and sell it today you would earn a total of  2.00  from holding China Energy Engineering or generate 20.0% return on investment over 90 days.

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

Johnson Controls International  vs.  China Energy Engineering

Johnson Controls Int

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Controls International are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile forward indicators, Johnson Controls reported solid returns over the last few months and may actually be approaching a breakup point.

China Energy Engineering

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Energy Engineering are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Johnson Controls and China Energy

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

The idea behind Johnson Controls International and China Energy Engineering 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.