Correlation Between Lan Fa and Hong Yi
Can any of the company-specific risk be diversified away by investing in both Lan Fa and Hong Yi 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 Lan Fa and Hong Yi into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Lan Fa Textile and Hong Yi Fiber, you can compare the effects of market volatilities on Lan Fa and Hong Yi 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 Lan Fa with a short position of Hong Yi. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lan Fa and Hong Yi.
Diversification Opportunities for Lan Fa and Hong Yi
Very poor diversification
The 3 months correlation between Lan and Hong is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Lan Fa Textile and Hong Yi Fiber in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hong Yi Fiber and Lan Fa 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 Lan Fa Textile are associated (or correlated) with Hong Yi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hong Yi Fiber has no effect on the direction of Lan Fa i.e., Lan Fa and Hong Yi go up and down completely randomly.
Pair Corralation between Lan Fa and Hong Yi
Assuming the 90 days trading horizon Lan Fa Textile is expected to under-perform the Hong Yi. In addition to that, Lan Fa is 1.92 times more volatile than Hong Yi Fiber. It trades about -0.47 of its total potential returns per unit of risk. Hong Yi Fiber is currently generating about -0.54 per unit of volatility. If you would invest 1,525 in Hong Yi Fiber on November 3, 2024 and sell it today you would lose (50.00) from holding Hong Yi Fiber or give up 3.28% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Lan Fa Textile vs. Hong Yi Fiber
Performance |
| Timeline |
| Lan Fa Textile |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| Hong Yi Fiber |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
Lan Fa and Hong Yi Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Lan Fa and Hong Yi
The main advantage of trading using opposite Lan Fa and Hong Yi positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lan Fa position performs unexpectedly, Hong Yi 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 Hong Yi will offset losses from the drop in Hong Yi's long position.The idea behind Lan Fa Textile and Hong Yi Fiber 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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