Correlation Between Chunghwa Chemical and Formosa Laboratories

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

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

Diversification Opportunities for Chunghwa Chemical and Formosa Laboratories

0.9

Correlation Coefficient

Chunghwa Chemical  Formosa Laboratories

Almost no diversification

The 3 months correlation between Chunghwa and Formosa is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Chunghwa Chemical Synthesis and Formosa Laboratories in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Laboratories and Chunghwa Chemical 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 Chunghwa Chemical Synthesis are associated (or correlated) with Formosa Laboratories. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Laboratories has no effect on the direction of Chunghwa Chemical i.e., Chunghwa Chemical and Formosa Laboratories go up and down completely randomly.

Pair Corralation between Chunghwa Chemical and Formosa Laboratories

Assuming the 90 days trading horizon Chunghwa Chemical Synthesis is expected to under-perform the Formosa Laboratories. But the stock apears to be less risky and, when comparing its historical volatility, Chunghwa Chemical Synthesis is 1.56 times less risky than Formosa Laboratories. The stock trades about -0.28 of its potential returns per unit of risk. The Formosa Laboratories is currently generating about -0.18 of returns per unit of risk over similar time horizon. If you would invest  9,000  in Formosa Laboratories on September 14, 2024 and sell it today you would lose (1,780) from holding Formosa Laboratories or give up 19.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.41%
Values	Daily Returns

Chunghwa Chemical Synthesis  vs.  Formosa Laboratories

Chunghwa Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Chunghwa Chemical Synthesis 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 January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Formosa Laboratories

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Laboratories 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 January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Chunghwa Chemical and Formosa Laboratories

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

The idea behind Chunghwa Chemical Synthesis and Formosa Laboratories 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.