Correlation Between Lien Hwa and Taiwan Fertilizer

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

By analyzing existing cross correlation between Lien Hwa Industrial and Taiwan Fertilizer Co, you can compare the effects of market volatilities on Lien Hwa and Taiwan Fertilizer 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 Lien Hwa with a short position of Taiwan Fertilizer. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lien Hwa and Taiwan Fertilizer.

Diversification Opportunities for Lien Hwa and Taiwan Fertilizer

0.75

Correlation Coefficient

Lien Hwa  Taiwan Fertilizer

Poor diversification

The 3 months correlation between Lien and Taiwan is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Lien Hwa Industrial and Taiwan Fertilizer Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Fertilizer and Lien Hwa 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 Lien Hwa Industrial are associated (or correlated) with Taiwan Fertilizer. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Fertilizer has no effect on the direction of Lien Hwa i.e., Lien Hwa and Taiwan Fertilizer go up and down completely randomly.

Pair Corralation between Lien Hwa and Taiwan Fertilizer

Assuming the 90 days trading horizon Lien Hwa Industrial is expected to generate 1.9 times more return on investment than Taiwan Fertilizer. However, Lien Hwa is 1.9 times more volatile than Taiwan Fertilizer Co. It trades about -0.07 of its potential returns per unit of risk. Taiwan Fertilizer Co is currently generating about -0.45 per unit of risk. If you would invest  5,700  in Lien Hwa Industrial on September 18, 2024 and sell it today you would lose (90.00) from holding Lien Hwa Industrial or give up 1.58% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Lien Hwa Industrial  vs.  Taiwan Fertilizer Co

Lien Hwa Industrial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lien Hwa Industrial has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Taiwan Fertilizer

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Taiwan Fertilizer Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Pair Trading with Lien Hwa and Taiwan Fertilizer

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

The idea behind Lien Hwa Industrial and Taiwan Fertilizer Co 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 Transaction History module to view history of all your transactions and understand their impact on performance.