Correlation Between China Steel and Formosa Plastics

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

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

Diversification Opportunities for China Steel and Formosa Plastics

0.82

Correlation Coefficient

China Steel  Formosa Plastics

Very poor diversification

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

Pair Corralation between China Steel and Formosa Plastics

Assuming the 90 days trading horizon China Steel is expected to generate 1.41 times less return on investment than Formosa Plastics. But when comparing it to its historical volatility, China Steel Chemical is 3.68 times less risky than Formosa Plastics. It trades about 0.12 of its potential returns per unit of risk. Formosa Plastics Corp is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,550  in Formosa Plastics Corp on December 30, 2024 and sell it today you would earn a total of  200.00  from holding Formosa Plastics Corp or generate 5.63% return on investment over 90 days.

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

China Steel Chemical  vs.  Formosa Plastics Corp

China Steel Chemical

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Steel Chemical are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, China Steel is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Formosa Plastics Corp

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Formosa Plastics Corp are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Formosa Plastics may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with China Steel and Formosa Plastics

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

The idea behind China Steel Chemical and Formosa Plastics Corp 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.

Check out your portfolio center.

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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.