Can any of the company-specific risk be diversified away by investing in both Korea Electric and China Resources 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 Korea Electric and China Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Korea Electric Power and China Resources Power, you can compare the effects of market volatilities on Korea Electric and China Resources 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 Korea Electric with a short position of China Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Korea Electric and China Resources.
Diversification Opportunities for Korea Electric and China Resources
The 3 months correlation between Korea and China is -0.74. Overlapping area represents the amount of risk that can be diversified away by holding Korea Electric Power and China Resources Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Resources Power and Korea Electric 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 Korea Electric Power are associated (or correlated) with China Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Resources Power has no effect on the direction of Korea Electric i.e., Korea Electric and China Resources go up and down completely randomly.
Pair Corralation between Korea Electric and China Resources
Considering the 90-day investment horizon Korea Electric Power is expected to under-perform the China Resources. But the stock apears to be less risky and, when comparing its historical volatility, Korea Electric Power is 1.89 times less risky than China Resources. The stock trades about -0.12 of its potential returns per unit of risk. The China Resources Power is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest 3,540 in China Resources Power on March 6, 2024 and sell it today you would earn a total of 0.00 from holding China Resources Power or generate 0.0% return on investment over 90 days.
Over the last 90 days Korea Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Even with weak performance in the last few months, the Stock's technical and fundamental indicators remain relatively invariable which may send shares a bit higher in July 2024. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.
Compared to the overall equity markets, risk-adjusted returns on investments in China Resources Power are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking indicators, China Resources showed solid returns over the last few months and may actually be approaching a breakup point.