Correlation Between New China and Blue Sail

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Apply Can any of the company-specific risk be diversified away by investing in both New China and Blue Sail 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 New China and Blue Sail into the same portfolio, which is an essential part of the fundamental portfolio management process.

Diversification Opportunities for New China and Blue Sail

Pair Corralation between New China and Blue Sail

New China Life  vs.  Blue Sail Medical

Pair Trading with New China and Blue Sail

The main advantage of trading using opposite New China and Blue Sail positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if New China position performs unexpectedly, Blue Sail 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 Blue Sail will offset losses from the drop in Blue Sail's long position.The idea behind New China Life and Blue Sail Medical 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.

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