Correlation Between ESUN Financial and Cathay Financial

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

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

Diversification Opportunities for ESUN Financial and Cathay Financial

0.21

Correlation Coefficient

ESUN Financial  Cathay Financial

Modest diversification

The 3 months correlation between ESUN and Cathay is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding ESUN Financial Holding and Cathay Financial Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Financial Holding and ESUN 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 ESUN Financial Holding are associated (or correlated) with Cathay Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Financial Holding has no effect on the direction of ESUN Financial i.e., ESUN Financial and Cathay Financial go up and down completely randomly.

Pair Corralation between ESUN Financial and Cathay Financial

Assuming the 90 days trading horizon ESUN Financial Holding is expected to generate 1.31 times more return on investment than Cathay Financial. However, ESUN Financial is 1.31 times more volatile than Cathay Financial Holding. It trades about 0.21 of its potential returns per unit of risk. Cathay Financial Holding is currently generating about 0.27 per unit of risk. If you would invest  2,800  in ESUN Financial Holding on December 4, 2024 and sell it today you would earn a total of  125.00  from holding ESUN Financial Holding or generate 4.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

ESUN Financial Holding  vs.  Cathay Financial Holding

ESUN Financial Holding

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ESUN Financial Holding are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, ESUN Financial may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Cathay Financial Holding

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cathay Financial Holding has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Cathay Financial 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 ESUN Financial and Cathay Financial

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

The idea behind ESUN Financial Holding and Cathay Financial Holding 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.