Correlation Between Zhihu and Tencent Holdings

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

By analyzing existing cross correlation between Zhihu Inc ADR and Tencent Holdings, you can compare the effects of market volatilities on Zhihu and Tencent Holdings 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 Zhihu with a short position of Tencent Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Zhihu and Tencent Holdings.

Diversification Opportunities for Zhihu and Tencent Holdings

0.91

Correlation Coefficient

Zhihu  Tencent Holdings

Almost no diversification

The 3 months correlation between Zhihu and Tencent is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Zhihu Inc ADR and Tencent Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tencent Holdings and Zhihu 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 Zhihu Inc ADR are associated (or correlated) with Tencent Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tencent Holdings has no effect on the direction of Zhihu i.e., Zhihu and Tencent Holdings go up and down completely randomly.

Pair Corralation between Zhihu and Tencent Holdings

Allowing for the 90-day total investment horizon Zhihu Inc ADR is expected to generate 1.51 times more return on investment than Tencent Holdings. However, Zhihu is 1.51 times more volatile than Tencent Holdings. It trades about 0.11 of its potential returns per unit of risk. Tencent Holdings is currently generating about 0.13 per unit of risk. If you would invest  362.00  in Zhihu Inc ADR on December 28, 2024 and sell it today you would earn a total of  103.00  from holding Zhihu Inc ADR or generate 28.45% return on investment over 90 days.

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

Zhihu Inc ADR  vs.  Tencent Holdings

Zhihu Inc ADR

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Zhihu Inc ADR are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating technical indicators, Zhihu demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Tencent Holdings

Risk-Adjusted Performance

OK

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

Pair Trading with Zhihu and Tencent Holdings

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

The idea behind Zhihu Inc ADR and Tencent Holdings 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.