Correlation Between China Coal and Yanzhou Coal

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

By analyzing existing cross correlation between China Coal Energy and Yanzhou Coal Mining, you can compare the effects of market volatilities on China Coal and Yanzhou Coal 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 China Coal with a short position of Yanzhou Coal. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Coal and Yanzhou Coal.

Diversification Opportunities for China Coal and Yanzhou Coal

0.05

Correlation Coefficient

China Coal  Yanzhou Coal

Significant diversification

The 3 months correlation between China and Yanzhou is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding China Coal Energy and Yanzhou Coal Mining in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yanzhou Coal Mining and China Coal 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 China Coal Energy are associated (or correlated) with Yanzhou Coal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yanzhou Coal Mining has no effect on the direction of China Coal i.e., China Coal and Yanzhou Coal go up and down completely randomly.

Pair Corralation between China Coal and Yanzhou Coal

Assuming the 90 days horizon China Coal Energy is expected to under-perform the Yanzhou Coal. But the pink sheet apears to be less risky and, when comparing its historical volatility, China Coal Energy is 2.45 times less risky than Yanzhou Coal. The pink sheet trades about -0.1 of its potential returns per unit of risk. The Yanzhou Coal Mining is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  198.00  in Yanzhou Coal Mining on January 28, 2024 and sell it today you would earn a total of  36.00  from holding Yanzhou Coal Mining or generate 18.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

China Coal Energy  vs.  Yanzhou Coal Mining

China Coal Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Coal Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, China Coal showed solid returns over the last few months and may actually be approaching a breakup point.

Yanzhou Coal Mining

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Yanzhou Coal Mining are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, Yanzhou Coal may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with China Coal and Yanzhou Coal

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

The idea behind China Coal Energy and Yanzhou Coal Mining 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.