Correlation Between Hotai and Formosa International

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

By analyzing existing cross correlation between Hotai Motor Co and Formosa International Hotels, you can compare the effects of market volatilities on Hotai and Formosa International 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 Hotai with a short position of Formosa International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hotai and Formosa International.

Diversification Opportunities for Hotai and Formosa International

0.81

Correlation Coefficient

Hotai  Formosa International

Very poor diversification

The 3 months correlation between Hotai and Formosa is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Hotai Motor Co and Formosa International Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa International and Hotai 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 Hotai Motor Co are associated (or correlated) with Formosa International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa International has no effect on the direction of Hotai i.e., Hotai and Formosa International go up and down completely randomly.

Pair Corralation between Hotai and Formosa International

Assuming the 90 days trading horizon Hotai Motor Co is expected to generate 1.97 times more return on investment than Formosa International. However, Hotai is 1.97 times more volatile than Formosa International Hotels. It trades about -0.09 of its potential returns per unit of risk. Formosa International Hotels is currently generating about -0.24 per unit of risk. If you would invest  62,700  in Hotai Motor Co on September 15, 2024 and sell it today you would lose (1,500) from holding Hotai Motor Co or give up 2.39% of portfolio value over 90 days.

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

Hotai Motor Co  vs.  Formosa International Hotels

Hotai Motor

Risk-Adjusted Performance

0 of 100

Very Weak

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

Formosa International

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa International Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Formosa International 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 Hotai and Formosa International

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

The idea behind Hotai Motor Co and Formosa International Hotels 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.