Correlation Between Air China and China Longyuan

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

Diversification Opportunities for Air China and China Longyuan

0.85
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Air and China is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Air China Ltd and China Longyuan Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Longyuan Power and Air 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 Air China Ltd are associated (or correlated) with China Longyuan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Longyuan Power has no effect on the direction of Air China i.e., Air China and China Longyuan go up and down completely randomly.

Pair Corralation between Air China and China Longyuan

Assuming the 90 days trading horizon Air China Ltd is expected to generate 0.56 times more return on investment than China Longyuan. However, Air China Ltd is 1.77 times less risky than China Longyuan. It trades about 0.28 of its potential returns per unit of risk. China Longyuan Power is currently generating about -0.07 per unit of risk. If you would invest  722.00  in Air China Ltd on August 29, 2024 and sell it today you would earn a total of  72.00  from holding Air China Ltd or generate 9.97% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Air China Ltd  vs.  China Longyuan Power

 Performance 
       Timeline  
Air China 

Risk-Adjusted Performance

9 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Air China Ltd are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Air China sustained solid returns over the last few months and may actually be approaching a breakup point.
China Longyuan Power 

Risk-Adjusted Performance

6 of 100

 
Weak
 
Strong
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in China Longyuan Power are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Longyuan sustained solid returns over the last few months and may actually be approaching a breakup point.

Air China and China Longyuan Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Air China and China Longyuan

The main advantage of trading using opposite Air China and China Longyuan positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Air China position performs unexpectedly, China Longyuan 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 China Longyuan will offset losses from the drop in China Longyuan's long position.
The idea behind Air China Ltd and China Longyuan Power 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.

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