Correlation Between Cathay Financial and Formosa Chemicals

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

By analyzing existing cross correlation between Cathay Financial Holding and Formosa Chemicals Fibre, you can compare the effects of market volatilities on Cathay Financial and Formosa Chemicals 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 Cathay Financial with a short position of Formosa Chemicals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Financial and Formosa Chemicals.

Diversification Opportunities for Cathay Financial and Formosa Chemicals

0.42

Correlation Coefficient

Cathay Financial  Formosa Chemicals

Very weak diversification

The 3 months correlation between Cathay and Formosa is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Financial Holding and Formosa Chemicals Fibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Chemicals Fibre and Cathay Financial 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 Cathay Financial Holding are associated (or correlated) with Formosa Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Chemicals Fibre has no effect on the direction of Cathay Financial i.e., Cathay Financial and Formosa Chemicals go up and down completely randomly.

Pair Corralation between Cathay Financial and Formosa Chemicals

Assuming the 90 days trading horizon Cathay Financial is expected to generate 1.81 times less return on investment than Formosa Chemicals. But when comparing it to its historical volatility, Cathay Financial Holding is 3.24 times less risky than Formosa Chemicals. It trades about 0.36 of its potential returns per unit of risk. Formosa Chemicals Fibre is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  2,770  in Formosa Chemicals Fibre on November 29, 2024 and sell it today you would earn a total of  235.00  from holding Formosa Chemicals Fibre or generate 8.48% return on investment over 90 days.

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

Cathay Financial Holding  vs.  Formosa Chemicals Fibre

Cathay Financial Holding

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Cathay Financial may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Formosa Chemicals Fibre

Risk-Adjusted Performance

Very Weak

Over the last 90 days Formosa Chemicals Fibre has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Pair Trading with Cathay Financial and Formosa Chemicals

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

The idea behind Cathay Financial Holding and Formosa Chemicals Fibre 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..