Correlation Between Ford and New China
Can any of the company-specific risk be diversified away by investing in both Ford and New China 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 Ford and New China into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and New China Life, you can compare the effects of market volatilities on Ford and New China 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 Ford with a short position of New China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and New China.
Diversification Opportunities for Ford and New China
Modest diversification
The 3 months correlation between Ford and New is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and New China Life in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New China Life and Ford 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 Ford Motor are associated (or correlated) with New China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New China Life has no effect on the direction of Ford i.e., Ford and New China go up and down completely randomly.
Pair Corralation between Ford and New China
Taking into account the 90-day investment horizon Ford is expected to generate 1.33 times less return on investment than New China. But when comparing it to its historical volatility, Ford Motor is 2.54 times less risky than New China. It trades about 0.25 of its potential returns per unit of risk. New China Life is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest 256.00 in New China Life on September 2, 2024 and sell it today you would earn a total of 32.00 from holding New China Life or generate 12.5% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
Ford Motor vs. New China Life
Performance |
| Timeline |
| Ford Motor |
| New China Life |
Ford and New China Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ford and New China
The main advantage of trading using opposite Ford and New China positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford position performs unexpectedly, New China 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 New China will offset losses from the drop in New China's long position.The idea behind Ford Motor and New China Life 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.| New China vs. Geely Automobile Holdings | New China vs. Singapore Telecommunications Limited | New China vs. INTERSHOP Communications Aktiengesellschaft | New China vs. INTER CARS SA |
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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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