Correlation Between Formosa Petrochemical and China Petrochemical

Can any of the company-specific risk be diversified away by investing in both Formosa Petrochemical and China Petrochemical 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 China Petrochemical 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 China Petrochemical Development, you can compare the effects of market volatilities on Formosa Petrochemical and China Petrochemical 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 China Petrochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Petrochemical and China Petrochemical.

Diversification Opportunities for Formosa Petrochemical and China Petrochemical

0.87

Correlation Coefficient

Formosa Petrochemical  China Petrochemical

Very poor diversification

The 3 months correlation between Formosa and China is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and China Petrochemical Developmen in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Petrochemical 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 China Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Petrochemical has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and China Petrochemical go up and down completely randomly.

Pair Corralation between Formosa Petrochemical and China Petrochemical

Assuming the 90 days trading horizon Formosa Petrochemical Corp is expected to under-perform the China Petrochemical. In addition to that, Formosa Petrochemical is 1.52 times more volatile than China Petrochemical Development. It trades about -0.02 of its total potential returns per unit of risk. China Petrochemical Development is currently generating about 0.05 per unit of volatility. If you would invest  804.00  in China Petrochemical Development on December 2, 2024 and sell it today you would earn a total of  32.00  from holding China Petrochemical Development or generate 3.98% return on investment over 90 days.

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

Formosa Petrochemical Corp  vs.  China Petrochemical Developmen

Formosa Petrochemical

Risk-Adjusted Performance

Very Weak

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

China Petrochemical

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Petrochemical Development are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, China Petrochemical 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 China Petrochemical

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

The idea behind Formosa Petrochemical Corp and China Petrochemical Development 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.