Correlation Between Shanghai Construction and Shenzhen Zhongzhuang

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Can any of the company-specific risk be diversified away by investing in both Shanghai Construction and Shenzhen Zhongzhuang 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 Shanghai Construction and Shenzhen Zhongzhuang into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Shanghai Construction Group and Shenzhen Zhongzhuang Construction, you can compare the effects of market volatilities on Shanghai Construction and Shenzhen Zhongzhuang 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 Shanghai Construction with a short position of Shenzhen Zhongzhuang. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Construction and Shenzhen Zhongzhuang.

Diversification Opportunities for Shanghai Construction and Shenzhen Zhongzhuang

ShanghaiShenzhenDiversified AwayShanghaiShenzhenDiversified Away100%
0.6
  Correlation Coefficient

Poor diversification

The 3 months correlation between Shanghai and Shenzhen is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Construction Group and Shenzhen Zhongzhuang Construct in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shenzhen Zhongzhuang and Shanghai Construction 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 Shanghai Construction Group are associated (or correlated) with Shenzhen Zhongzhuang. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shenzhen Zhongzhuang has no effect on the direction of Shanghai Construction i.e., Shanghai Construction and Shenzhen Zhongzhuang go up and down completely randomly.

Pair Corralation between Shanghai Construction and Shenzhen Zhongzhuang

Assuming the 90 days trading horizon Shanghai Construction is expected to generate 4.12 times less return on investment than Shenzhen Zhongzhuang. But when comparing it to its historical volatility, Shanghai Construction Group is 1.81 times less risky than Shenzhen Zhongzhuang. It trades about 0.02 of its potential returns per unit of risk. Shenzhen Zhongzhuang Construction is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  263.00  in Shenzhen Zhongzhuang Construction on November 21, 2024 and sell it today you would earn a total of  94.00  from holding Shenzhen Zhongzhuang Construction or generate 35.74% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Shanghai Construction Group  vs.  Shenzhen Zhongzhuang Construct

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -100102030
JavaScript chart by amCharts 3.21.15600170 002822
       Timeline  
Shanghai Construction 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Shanghai Construction Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Shanghai Construction is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb2.42.52.62.72.82.93
Shenzhen Zhongzhuang 

Risk-Adjusted Performance

Insignificant

 
Weak
 
Strong
Over the last 90 days Shenzhen Zhongzhuang Construction has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Shenzhen Zhongzhuang is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb3.23.43.63.844.24.44.6

Shanghai Construction and Shenzhen Zhongzhuang Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-3.7-2.77-1.84-0.910.00.871.762.653.54 0.040.050.060.07
JavaScript chart by amCharts 3.21.15600170 002822
       Returns  

Pair Trading with Shanghai Construction and Shenzhen Zhongzhuang

The main advantage of trading using opposite Shanghai Construction and Shenzhen Zhongzhuang positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Shanghai Construction position performs unexpectedly, Shenzhen Zhongzhuang 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 Shenzhen Zhongzhuang will offset losses from the drop in Shenzhen Zhongzhuang's long position.
The idea behind Shanghai Construction Group and Shenzhen Zhongzhuang Construction 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.

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