Correlation Between Tong Hwa and Formosa Optical

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

By analyzing existing cross correlation between Tong Hwa Synthetic Fiber and Formosa Optical Technology, you can compare the effects of market volatilities on Tong Hwa and Formosa Optical 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 Tong Hwa with a short position of Formosa Optical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tong Hwa and Formosa Optical.

Diversification Opportunities for Tong Hwa and Formosa Optical

-0.82

Correlation Coefficient

Tong Hwa  Formosa Optical

Pay attention - limited upside

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

Pair Corralation between Tong Hwa and Formosa Optical

Assuming the 90 days trading horizon Tong Hwa Synthetic Fiber is expected to generate 1.99 times more return on investment than Formosa Optical. However, Tong Hwa is 1.99 times more volatile than Formosa Optical Technology. It trades about 0.07 of its potential returns per unit of risk. Formosa Optical Technology is currently generating about 0.13 per unit of risk. If you would invest  1,425  in Tong Hwa Synthetic Fiber on October 10, 2024 and sell it today you would earn a total of  1,375  from holding Tong Hwa Synthetic Fiber or generate 96.49% return on investment over 90 days.

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

Tong Hwa Synthetic Fiber  vs.  Formosa Optical Technology

Tong Hwa Synthetic

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tong Hwa Synthetic Fiber has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in February 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Formosa Optical Tech

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Formosa Optical Technology are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Formosa Optical may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Tong Hwa and Formosa Optical

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

The idea behind Tong Hwa Synthetic Fiber and Formosa Optical Technology 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.