Correlation Between CHINA HUARONG and Vale SA

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

By analyzing existing cross correlation between CHINA HUARONG ENERHD 50 and Vale SA, you can compare the effects of market volatilities on CHINA HUARONG and Vale SA 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 CHINA HUARONG with a short position of Vale SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of CHINA HUARONG and Vale SA.

Diversification Opportunities for CHINA HUARONG and Vale SA

0.28

Correlation Coefficient

CHINA HUARONG  Vale SA

Modest diversification

The 3 months correlation between CHINA and Vale is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding CHINA HUARONG ENERHD 50 and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA and CHINA HUARONG 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 CHINA HUARONG ENERHD 50 are associated (or correlated) with Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of CHINA HUARONG i.e., CHINA HUARONG and Vale SA go up and down completely randomly.

Pair Corralation between CHINA HUARONG and Vale SA

Assuming the 90 days trading horizon CHINA HUARONG ENERHD 50 is expected to generate 11.81 times more return on investment than Vale SA. However, CHINA HUARONG is 11.81 times more volatile than Vale SA. It trades about 0.14 of its potential returns per unit of risk. Vale SA is currently generating about -0.03 per unit of risk. If you would invest  0.05  in CHINA HUARONG ENERHD 50 on September 16, 2024 and sell it today you would earn a total of  0.10  from holding CHINA HUARONG ENERHD 50 or generate 200.0% return on investment over 90 days.

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

CHINA HUARONG ENERHD 50  vs.  Vale SA

CHINA HUARONG ENERHD

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CHINA HUARONG ENERHD 50 are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, CHINA HUARONG reported solid returns over the last few months and may actually be approaching a breakup point.

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with CHINA HUARONG and Vale SA

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

The idea behind CHINA HUARONG ENERHD 50 and Vale SA 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.