Correlation Between China and Basso Industry
Can any of the company-specific risk be diversified away by investing in both China and Basso Industry 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 and Basso Industry into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between China Motor Corp and Basso Industry Corp, you can compare the effects of market volatilities on China and Basso Industry 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 with a short position of Basso Industry. Check out your portfolio center. Please also check ongoing floating volatility patterns of China and Basso Industry.
Diversification Opportunities for China and Basso Industry
-0.36 | Correlation Coefficient |
Very good diversification
The 3 months correlation between China and Basso is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding China Motor Corp and Basso Industry Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basso Industry Corp and China 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 Motor Corp are associated (or correlated) with Basso Industry. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basso Industry Corp has no effect on the direction of China i.e., China and Basso Industry go up and down completely randomly.
Pair Corralation between China and Basso Industry
Assuming the 90 days trading horizon China Motor Corp is expected to under-perform the Basso Industry. In addition to that, China is 1.45 times more volatile than Basso Industry Corp. It trades about -0.06 of its total potential returns per unit of risk. Basso Industry Corp is currently generating about 0.09 per unit of volatility. If you would invest 4,135 in Basso Industry Corp on November 4, 2024 and sell it today you would earn a total of 60.00 from holding Basso Industry Corp or generate 1.45% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
China Motor Corp vs. Basso Industry Corp
Performance |
| Timeline |
| China Motor Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
OK
| Basso Industry Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
China and Basso Industry Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with China and Basso Industry
The main advantage of trading using opposite China and Basso Industry positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China position performs unexpectedly, Basso Industry 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 Basso Industry will offset losses from the drop in Basso Industry's long position.The idea behind China Motor Corp and Basso Industry Corp 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.
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