Correlation Between Formosa Petrochemical and Lien Hwa

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

By analyzing existing cross correlation between Formosa Petrochemical Corp and Lien Hwa Industrial, you can compare the effects of market volatilities on Formosa Petrochemical and Lien Hwa 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 Formosa Petrochemical with a short position of Lien Hwa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Petrochemical and Lien Hwa.

Diversification Opportunities for Formosa Petrochemical and Lien Hwa

0.24

Correlation Coefficient

Formosa Petrochemical  Lien Hwa

Modest diversification

The 3 months correlation between Formosa and Lien is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and Lien Hwa Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lien Hwa Industrial and Formosa Petrochemical 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 Formosa Petrochemical Corp are associated (or correlated) with Lien Hwa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lien Hwa Industrial has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and Lien Hwa go up and down completely randomly.

Pair Corralation between Formosa Petrochemical and Lien Hwa

Assuming the 90 days trading horizon Formosa Petrochemical Corp is expected to generate 2.25 times more return on investment than Lien Hwa. However, Formosa Petrochemical is 2.25 times more volatile than Lien Hwa Industrial. It trades about 0.06 of its potential returns per unit of risk. Lien Hwa Industrial is currently generating about -0.01 per unit of risk. If you would invest  3,460  in Formosa Petrochemical Corp on December 30, 2024 and sell it today you would earn a total of  270.00  from holding Formosa Petrochemical Corp or generate 7.8% return on investment over 90 days.

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

Formosa Petrochemical Corp  vs.  Lien Hwa Industrial

Formosa Petrochemical

Risk-Adjusted Performance

Insignificant

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

Lien Hwa Industrial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lien Hwa Industrial has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Lien Hwa 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 Formosa Petrochemical and Lien Hwa

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

The idea behind Formosa Petrochemical Corp and Lien Hwa Industrial 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .