Correlation Between Essential Utilities and China Water

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

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

Diversification Opportunities for Essential Utilities and China Water

0.0

Correlation Coefficient

Essential Utilities  China Water

Pay attention - limited upside

The 3 months correlation between Essential and China is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Essential Utilities and China Water Affairs in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Water Affairs and Essential Utilities 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 Essential Utilities are associated (or correlated) with China Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Water Affairs has no effect on the direction of Essential Utilities i.e., Essential Utilities and China Water go up and down completely randomly.

Pair Corralation between Essential Utilities and China Water

Given the investment horizon of 90 days Essential Utilities is expected to under-perform the China Water. But the stock apears to be less risky and, when comparing its historical volatility, Essential Utilities is 3.19 times less risky than China Water. The stock trades about -0.03 of its potential returns per unit of risk. The China Water Affairs is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  75.00  in China Water Affairs on October 21, 2024 and sell it today you would lose (4.00) from holding China Water Affairs or give up 5.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	52.99%
Values	Daily Returns

Essential Utilities  vs.  China Water Affairs

Essential Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Essential Utilities has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

China Water Affairs

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Water Affairs has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, China Water is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Essential Utilities and China Water

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

The idea behind Essential Utilities and China Water Affairs 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.