Correlation Between Fubon MSCI and Cathay Chemical

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

By analyzing existing cross correlation between Fubon MSCI Taiwan and Cathay Chemical Works, you can compare the effects of market volatilities on Fubon MSCI and Cathay Chemical 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 Fubon MSCI with a short position of Cathay Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fubon MSCI and Cathay Chemical.

Diversification Opportunities for Fubon MSCI and Cathay Chemical

0.27

Correlation Coefficient

Fubon MSCI  Cathay Chemical

Modest diversification

The 3 months correlation between Fubon and Cathay is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Fubon MSCI Taiwan and Cathay Chemical Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Chemical Works and Fubon MSCI 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 Fubon MSCI Taiwan are associated (or correlated) with Cathay Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Chemical Works has no effect on the direction of Fubon MSCI i.e., Fubon MSCI and Cathay Chemical go up and down completely randomly.

Pair Corralation between Fubon MSCI and Cathay Chemical

Assuming the 90 days trading horizon Fubon MSCI is expected to generate 1.57 times less return on investment than Cathay Chemical. But when comparing it to its historical volatility, Fubon MSCI Taiwan is 1.47 times less risky than Cathay Chemical. It trades about 0.09 of its potential returns per unit of risk. Cathay Chemical Works is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  2,582  in Cathay Chemical Works on December 4, 2024 and sell it today you would earn a total of  2,888  from holding Cathay Chemical Works or generate 111.85% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.79%
Values	Daily Returns

Fubon MSCI Taiwan  vs.  Cathay Chemical Works

Fubon MSCI Taiwan

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fubon MSCI Taiwan has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Fubon MSCI is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Cathay Chemical Works

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Chemical Works are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Cathay Chemical showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fubon MSCI and Cathay Chemical

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

The idea behind Fubon MSCI Taiwan and Cathay Chemical Works 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.