Correlation Between Shandong and China Securities

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

By analyzing existing cross correlation between Shandong Hi Speed RoadBridge and China Securities 800, you can compare the effects of market volatilities on Shandong and China Securities 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 Shandong with a short position of China Securities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shandong and China Securities.

Diversification Opportunities for Shandong and China Securities

0.77

Correlation Coefficient

Shandong  China Securities

Poor diversification

The 3 months correlation between Shandong and China is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Shandong Hi Speed RoadBridge and China Securities 800 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Securities 800 and Shandong 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 Shandong Hi Speed RoadBridge are associated (or correlated) with China Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Securities 800 has no effect on the direction of Shandong i.e., Shandong and China Securities go up and down completely randomly.

Pair Corralation between Shandong and China Securities

Assuming the 90 days trading horizon Shandong Hi Speed RoadBridge is expected to generate 1.33 times more return on investment than China Securities. However, Shandong is 1.33 times more volatile than China Securities 800. It trades about -0.06 of its potential returns per unit of risk. China Securities 800 is currently generating about -0.21 per unit of risk. If you would invest  574.00  in Shandong Hi Speed RoadBridge on January 9, 2025 and sell it today you would lose (21.00) from holding Shandong Hi Speed RoadBridge or give up 3.66% of portfolio value over 90 days.

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

Shandong Hi Speed RoadBridge  vs.  China Securities 800

Pair Trading with Shandong and China Securities

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

The idea behind Shandong Hi Speed RoadBridge and China Securities 800 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.