Can any of the company-specific risk be diversified away by investing in both China Overseas and UOL Group 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 Overseas and UOL Group into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between China Overseas Land and UOL Group, you can compare the effects of market volatilities on China Overseas and UOL Group 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 Overseas with a short position of UOL Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Overseas and UOL Group.
Diversification Opportunities for China Overseas and UOL Group
The 3 months correlation between China and UOL is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding China Overseas Land and UOL Group Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UOL Group and China Overseas 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 Overseas Land are associated (or correlated) with UOL Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UOL Group has no effect on the direction of China Overseas i.e., China Overseas and UOL Group go up and down completely randomly.
Pair Corralation between China Overseas and UOL Group
Assuming the 90 days horizon China Overseas Land is expected to under-perform the UOL Group. In addition to that, China Overseas is 1.81 times more volatile than UOL Group. It trades about -0.29 of its total potential returns per unit of risk. UOL Group is currently generating about -0.06 per unit of volatility. If you would invest 1,809 in UOL Group on September 7, 2023 and sell it today you would lose (38.00) from holding UOL Group or give up 2.1% of portfolio value over 90 days.
Over the last 90 days China Overseas Land has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in January 2024. The current disturbance may also be a sign of long term up-swing for the company investors.
Over the last 90 days UOL Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, UOL Group is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite China Overseas and UOL Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Overseas position performs unexpectedly, UOL Group 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 UOL Group will offset losses from the drop in UOL Group's long position.
The idea behind China Overseas Land and UOL Group 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.
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