Correlation Between China Shenhua and Adaro Energy

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

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

Diversification Opportunities for China Shenhua and Adaro Energy

0.18

Correlation Coefficient

China Shenhua  Adaro Energy

Average diversification

The 3 months correlation between China and Adaro is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding China Shenhua Energy and Adaro Energy Tbk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Adaro Energy Tbk and China Shenhua 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 Shenhua Energy are associated (or correlated) with Adaro Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Adaro Energy Tbk has no effect on the direction of China Shenhua i.e., China Shenhua and Adaro Energy go up and down completely randomly.

Pair Corralation between China Shenhua and Adaro Energy

Assuming the 90 days horizon China Shenhua is expected to generate 3.05 times less return on investment than Adaro Energy. But when comparing it to its historical volatility, China Shenhua Energy is 1.31 times less risky than Adaro Energy. It trades about 0.04 of its potential returns per unit of risk. Adaro Energy Tbk is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  983.00  in Adaro Energy Tbk on July 30, 2024 and sell it today you would earn a total of  171.00  from holding Adaro Energy Tbk or generate 17.4% return on investment over 90 days.

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

China Shenhua Energy  vs.  Adaro Energy Tbk

China Shenhua Energy

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Shenhua Energy are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, China Shenhua is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Adaro Energy Tbk

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Adaro Energy Tbk are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Adaro Energy showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Shenhua and Adaro Energy

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

The idea behind China Shenhua Energy and Adaro Energy Tbk 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 Commodity Directory module to find actively traded commodities issued by global exchanges.