Correlation Between ABC Taiwan and Johnson Chemical

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

By analyzing existing cross correlation between ABC Taiwan Electronics and Johnson Chemical Pharmaceutical, you can compare the effects of market volatilities on ABC Taiwan and Johnson Chemical 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 ABC Taiwan with a short position of Johnson Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABC Taiwan and Johnson Chemical.

Diversification Opportunities for ABC Taiwan and Johnson Chemical

0.33

Correlation Coefficient

ABC Taiwan  Johnson Chemical

Weak diversification

The 3 months correlation between ABC and Johnson is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding ABC Taiwan Electronics and Johnson Chemical Pharmaceutica in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Chemical Pha and ABC Taiwan 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 ABC Taiwan Electronics are associated (or correlated) with Johnson Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Chemical Pha has no effect on the direction of ABC Taiwan i.e., ABC Taiwan and Johnson Chemical go up and down completely randomly.

Pair Corralation between ABC Taiwan and Johnson Chemical

Assuming the 90 days trading horizon ABC Taiwan Electronics is expected to generate 0.96 times more return on investment than Johnson Chemical. However, ABC Taiwan Electronics is 1.04 times less risky than Johnson Chemical. It trades about 0.06 of its potential returns per unit of risk. Johnson Chemical Pharmaceutical is currently generating about 0.02 per unit of risk. If you would invest  1,985  in ABC Taiwan Electronics on September 15, 2024 and sell it today you would earn a total of  120.00  from holding ABC Taiwan Electronics or generate 6.05% return on investment over 90 days.

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

ABC Taiwan Electronics  vs.  Johnson Chemical Pharmaceutica

ABC Taiwan Electronics

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in ABC Taiwan Electronics are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, ABC Taiwan may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Johnson Chemical Pha

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Chemical Pharmaceutical are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Johnson Chemical 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 ABC Taiwan and Johnson Chemical

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

The idea behind ABC Taiwan Electronics and Johnson Chemical Pharmaceutical 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.