Correlation Between China Airlines and Formosan Rubber

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

By analyzing existing cross correlation between China Airlines and Formosan Rubber Group, you can compare the effects of market volatilities on China Airlines and Formosan Rubber 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 Airlines with a short position of Formosan Rubber. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Airlines and Formosan Rubber.

Diversification Opportunities for China Airlines and Formosan Rubber

0.36

Correlation Coefficient

China Airlines  Formosan Rubber

Weak diversification

The 3 months correlation between China and Formosan is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding China Airlines and Formosan Rubber Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosan Rubber Group and China Airlines 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 Airlines are associated (or correlated) with Formosan Rubber. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosan Rubber Group has no effect on the direction of China Airlines i.e., China Airlines and Formosan Rubber go up and down completely randomly.

Pair Corralation between China Airlines and Formosan Rubber

Assuming the 90 days trading horizon China Airlines is expected to generate 1.74 times more return on investment than Formosan Rubber. However, China Airlines is 1.74 times more volatile than Formosan Rubber Group. It trades about 0.05 of its potential returns per unit of risk. Formosan Rubber Group is currently generating about 0.04 per unit of risk. If you would invest  1,890  in China Airlines on September 21, 2024 and sell it today you would earn a total of  720.00  from holding China Airlines or generate 38.1% return on investment over 90 days.

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

China Airlines  vs.  Formosan Rubber Group

China Airlines

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Airlines are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Formosan Rubber Group

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Formosan Rubber Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Formosan Rubber 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 China Airlines and Formosan Rubber

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

The idea behind China Airlines and Formosan Rubber Group 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .