Correlation Between Cheng Mei and Formosan Rubber

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

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

Diversification Opportunities for Cheng Mei and Formosan Rubber

0.64

Correlation Coefficient

Cheng Mei  Formosan Rubber

Poor diversification

The 3 months correlation between Cheng and Formosan is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Cheng Mei Materials 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 Cheng Mei 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 Cheng Mei Materials 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 Cheng Mei i.e., Cheng Mei and Formosan Rubber go up and down completely randomly.

Pair Corralation between Cheng Mei and Formosan Rubber

Assuming the 90 days trading horizon Cheng Mei Materials is expected to under-perform the Formosan Rubber. In addition to that, Cheng Mei is 2.25 times more volatile than Formosan Rubber Group. It trades about -0.03 of its total potential returns per unit of risk. Formosan Rubber Group is currently generating about 0.07 per unit of volatility. If you would invest  2,585  in Formosan Rubber Group on December 30, 2024 and sell it today you would earn a total of  60.00  from holding Formosan Rubber Group or generate 2.32% return on investment over 90 days.

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

Cheng Mei Materials  vs.  Formosan Rubber Group

Cheng Mei Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cheng Mei Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Cheng Mei is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Formosan Rubber Group

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Formosan Rubber Group are ranked lower than 5 (%) 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 Cheng Mei and Formosan Rubber

The main advantage of trading using opposite Cheng Mei and Formosan Rubber positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cheng Mei 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 Cheng Mei Materials 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.

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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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.