Correlation Between Yang Ming and Formosa Optical

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

By analyzing existing cross correlation between Yang Ming Marine and Formosa Optical Technology, you can compare the effects of market volatilities on Yang Ming and Formosa Optical 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 Yang Ming with a short position of Formosa Optical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Yang Ming and Formosa Optical.

Diversification Opportunities for Yang Ming and Formosa Optical

0.9

Correlation Coefficient

Yang Ming  Formosa Optical

Almost no diversification

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

Pair Corralation between Yang Ming and Formosa Optical

Assuming the 90 days trading horizon Yang Ming is expected to generate 1.07 times less return on investment than Formosa Optical. In addition to that, Yang Ming is 1.98 times more volatile than Formosa Optical Technology. It trades about 0.06 of its total potential returns per unit of risk. Formosa Optical Technology is currently generating about 0.13 per unit of volatility. If you would invest  5,196  in Formosa Optical Technology on October 7, 2024 and sell it today you would earn a total of  5,704  from holding Formosa Optical Technology or generate 109.78% return on investment over 90 days.

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

Yang Ming Marine  vs.  Formosa Optical Technology

Yang Ming Marine

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Yang Ming Marine are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Yang Ming showed solid returns over the last few months and may actually be approaching a breakup point.

Formosa Optical Tech

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Formosa Optical Technology are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Formosa Optical may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Yang Ming and Formosa Optical

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

The idea behind Yang Ming Marine and Formosa Optical Technology 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.