Correlation Between China Automotive and China XD

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

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

Diversification Opportunities for China Automotive and China XD

0.14

Correlation Coefficient

China Automotive  China XD

Average diversification

The 3 months correlation between China and China is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding China Automotive Systems and China XD Plastics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China XD Plastics and China Automotive 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 Automotive Systems are associated (or correlated) with China XD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China XD Plastics has no effect on the direction of China Automotive i.e., China Automotive and China XD go up and down completely randomly.

Pair Corralation between China Automotive and China XD

Given the investment horizon of 90 days China Automotive is expected to generate 43.12 times less return on investment than China XD. But when comparing it to its historical volatility, China Automotive Systems is 14.86 times less risky than China XD. It trades about 0.03 of its potential returns per unit of risk. China XD Plastics is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  0.38  in China XD Plastics on January 20, 2024 and sell it today you would lose (0.14) from holding China XD Plastics or give up 36.84% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	39.39%
Values	Daily Returns

China Automotive Systems  vs.  China XD Plastics

China Automotive Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Automotive Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, China Automotive is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

China XD Plastics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China XD Plastics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, China XD is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with China Automotive and China XD

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

The idea behind China Automotive Systems and China XD Plastics 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 AI Investment Finder module to use AI to screen and filter profitable investment opportunities.