Correlation Between Cathay Taiwan and Fubon TWSE

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

By analyzing existing cross correlation between Cathay Taiwan 5G and Fubon TWSE Corporate, you can compare the effects of market volatilities on Cathay Taiwan and Fubon TWSE 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 Cathay Taiwan with a short position of Fubon TWSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Taiwan and Fubon TWSE.

Diversification Opportunities for Cathay Taiwan and Fubon TWSE

0.82

Correlation Coefficient

Cathay Taiwan  Fubon TWSE

Very poor diversification

The 3 months correlation between Cathay and Fubon is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Taiwan 5G and Fubon TWSE Corporate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fubon TWSE Corporate and Cathay Taiwan 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 Cathay Taiwan 5G are associated (or correlated) with Fubon TWSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fubon TWSE Corporate has no effect on the direction of Cathay Taiwan i.e., Cathay Taiwan and Fubon TWSE go up and down completely randomly.

Pair Corralation between Cathay Taiwan and Fubon TWSE

Assuming the 90 days trading horizon Cathay Taiwan 5G is expected to generate 1.06 times more return on investment than Fubon TWSE. However, Cathay Taiwan is 1.06 times more volatile than Fubon TWSE Corporate. It trades about 0.13 of its potential returns per unit of risk. Fubon TWSE Corporate is currently generating about 0.1 per unit of risk. If you would invest  2,270  in Cathay Taiwan 5G on September 16, 2024 and sell it today you would earn a total of  192.00  from holding Cathay Taiwan 5G or generate 8.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	93.75%
Values	Daily Returns

Cathay Taiwan 5G  vs.  Fubon TWSE Corporate

Cathay Taiwan 5G

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Taiwan 5G are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, Cathay Taiwan may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Fubon TWSE Corporate

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fubon TWSE Corporate are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, Fubon TWSE may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Cathay Taiwan and Fubon TWSE

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

The idea behind Cathay Taiwan 5G and Fubon TWSE Corporate 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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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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.