Correlation Between Chinese Maritime and Taiwan Weighted

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

By analyzing existing cross correlation between Chinese Maritime Transport and Taiwan Weighted, you can compare the effects of market volatilities on Chinese Maritime and Taiwan Weighted 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 Chinese Maritime with a short position of Taiwan Weighted. Check out your portfolio center. Please also check ongoing floating volatility patterns of Chinese Maritime and Taiwan Weighted.

Diversification Opportunities for Chinese Maritime and Taiwan Weighted

-0.37

Correlation Coefficient

Chinese Maritime  Taiwan Weighted

Very good diversification

The 3 months correlation between Chinese and Taiwan is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Chinese Maritime Transport and Taiwan Weighted in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Weighted and Chinese Maritime 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 Chinese Maritime Transport are associated (or correlated) with Taiwan Weighted. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Weighted has no effect on the direction of Chinese Maritime i.e., Chinese Maritime and Taiwan Weighted go up and down completely randomly.

Pair Corralation between Chinese Maritime and Taiwan Weighted

Assuming the 90 days trading horizon Chinese Maritime Transport is expected to under-perform the Taiwan Weighted. In addition to that, Chinese Maritime is 1.07 times more volatile than Taiwan Weighted. It trades about -0.15 of its total potential returns per unit of risk. Taiwan Weighted is currently generating about -0.08 per unit of volatility. If you would invest  2,326,794  in Taiwan Weighted on October 6, 2024 and sell it today you would lose (35,964) from holding Taiwan Weighted or give up 1.55% of portfolio value over 90 days.

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

Chinese Maritime Transport  vs.  Taiwan Weighted

Pair Trading with Chinese Maritime and Taiwan Weighted

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

The idea behind Chinese Maritime Transport and Taiwan Weighted 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.