Correlation Between Guangdong Investment and United Utilities
Can any of the company-specific risk be diversified away by investing in both Guangdong Investment and United Utilities 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 Guangdong Investment and United Utilities into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Guangdong Investment Limited and United Utilities Group, you can compare the effects of market volatilities on Guangdong Investment and United Utilities 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 Guangdong Investment with a short position of United Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Guangdong Investment and United Utilities.
Diversification Opportunities for Guangdong Investment and United Utilities
0.5 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Guangdong and United is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Guangdong Investment Limited and United Utilities Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Utilities and Guangdong Investment 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 Guangdong Investment Limited are associated (or correlated) with United Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Utilities has no effect on the direction of Guangdong Investment i.e., Guangdong Investment and United Utilities go up and down completely randomly.
Pair Corralation between Guangdong Investment and United Utilities
Assuming the 90 days horizon Guangdong Investment Limited is expected to generate 3.3 times more return on investment than United Utilities. However, Guangdong Investment is 3.3 times more volatile than United Utilities Group. It trades about 0.12 of its potential returns per unit of risk. United Utilities Group is currently generating about 0.07 per unit of risk. If you would invest 27.00 in Guangdong Investment Limited on August 25, 2024 and sell it today you would earn a total of 29.00 from holding Guangdong Investment Limited or generate 107.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Guangdong Investment Limited vs. United Utilities Group
Performance |
| Timeline |
| Guangdong Investment |
| United Utilities |
Guangdong Investment and United Utilities Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Guangdong Investment and United Utilities
The main advantage of trading using opposite Guangdong Investment and United Utilities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Guangdong Investment position performs unexpectedly, United Utilities 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 United Utilities will offset losses from the drop in United Utilities' long position.The idea behind Guangdong Investment Limited and United Utilities Group 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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