Correlation Between Basso Industry and Formosan Union

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

By analyzing existing cross correlation between Basso Industry Corp and Formosan Union Chemical, you can compare the effects of market volatilities on Basso Industry and Formosan Union 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 Basso Industry with a short position of Formosan Union. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basso Industry and Formosan Union.

Diversification Opportunities for Basso Industry and Formosan Union

0.86

Correlation Coefficient

Basso Industry  Formosan Union

Very poor diversification

The 3 months correlation between Basso and Formosan is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Basso Industry Corp and Formosan Union Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosan Union Chemical and Basso Industry 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 Basso Industry Corp are associated (or correlated) with Formosan Union. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosan Union Chemical has no effect on the direction of Basso Industry i.e., Basso Industry and Formosan Union go up and down completely randomly.

Pair Corralation between Basso Industry and Formosan Union

Assuming the 90 days trading horizon Basso Industry Corp is expected to generate 0.88 times more return on investment than Formosan Union. However, Basso Industry Corp is 1.14 times less risky than Formosan Union. It trades about -0.01 of its potential returns per unit of risk. Formosan Union Chemical is currently generating about -0.03 per unit of risk. If you would invest  4,285  in Basso Industry Corp on December 23, 2024 and sell it today you would lose (30.00) from holding Basso Industry Corp or give up 0.7% of portfolio value over 90 days.

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

Basso Industry Corp  vs.  Formosan Union Chemical

Basso Industry Corp

Risk-Adjusted Performance

Very Weak

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

Formosan Union Chemical

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Basso Industry and Formosan Union

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

The idea behind Basso Industry Corp and Formosan Union Chemical 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.