Correlation Between Chung Hwa and Formosa Plastics

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

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

Diversification Opportunities for Chung Hwa and Formosa Plastics

0.51

Correlation Coefficient

Chung Hwa  Formosa Plastics

Very weak diversification

The 3 months correlation between Chung and Formosa is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Chung Hwa 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 Chung 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 Chung Hwa 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 Chung Hwa i.e., Chung Hwa and Formosa Plastics go up and down completely randomly.

Pair Corralation between Chung Hwa and Formosa Plastics

Assuming the 90 days trading horizon Chung Hwa Chemical is expected to under-perform the Formosa Plastics. But the stock apears to be less risky and, when comparing its historical volatility, Chung Hwa Chemical is 1.58 times less risky than Formosa Plastics. The stock trades about -0.06 of its potential returns per unit of risk. The 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	Weak
Accuracy	100.0%
Values	Daily Returns

Chung Hwa Chemical  vs.  Formosa Plastics Corp

Chung Hwa Chemical

Risk-Adjusted Performance

Very Weak

Over the last 90 days Chung Hwa Chemical 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.

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 Chung Hwa and Formosa Plastics

The main advantage of trading using opposite Chung Hwa and Formosa Plastics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Chung Hwa 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 Chung Hwa 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.

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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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.