Correlation Between Formosa Plastics and Formosa Chemicals

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

By analyzing existing cross correlation between Formosa Plastics Corp and Formosa Chemicals Fibre, you can compare the effects of market volatilities on Formosa Plastics and Formosa Chemicals 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 Formosa Plastics with a short position of Formosa Chemicals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and Formosa Chemicals.

Diversification Opportunities for Formosa Plastics and Formosa Chemicals

0.96

Correlation Coefficient

Formosa Plastics  Formosa Chemicals

Almost no diversification

The 3 months correlation between Formosa and Formosa is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and Formosa Chemicals Fibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Chemicals Fibre and Formosa Plastics 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 Formosa Plastics Corp are associated (or correlated) with Formosa Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Chemicals Fibre has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and Formosa Chemicals go up and down completely randomly.

Pair Corralation between Formosa Plastics and Formosa Chemicals

Assuming the 90 days trading horizon Formosa Plastics Corp is expected to generate 1.1 times more return on investment than Formosa Chemicals. However, Formosa Plastics is 1.1 times more volatile than Formosa Chemicals Fibre. It trades about -0.01 of its potential returns per unit of risk. Formosa Chemicals Fibre is currently generating about -0.08 per unit of risk. If you would invest  4,135  in Formosa Plastics Corp on November 29, 2024 and sell it today you would lose (170.00) from holding Formosa Plastics Corp or give up 4.11% of portfolio value over 90 days.

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

Formosa Plastics Corp  vs.  Formosa Chemicals Fibre

Formosa Plastics Corp

Risk-Adjusted Performance

Very Weak

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

Formosa Chemicals Fibre

Risk-Adjusted Performance

Very Weak

Over the last 90 days Formosa Chemicals Fibre 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 Formosa Plastics and Formosa Chemicals

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

The idea behind Formosa Plastics Corp and Formosa Chemicals Fibre 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.