Correlation Between Formosa Petrochemical and Oriental Union

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

Diversification Opportunities for Formosa Petrochemical and Oriental Union

0.81

Correlation Coefficient

Formosa Petrochemical  Oriental Union

Very poor diversification

The 3 months correlation between Formosa and Oriental is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and Oriental Union Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Oriental Union Chemical 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 Oriental Union. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Oriental Union Chemical has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and Oriental Union go up and down completely randomly.

Pair Corralation between Formosa Petrochemical and Oriental Union

Assuming the 90 days trading horizon Formosa Petrochemical is expected to generate 3.5 times less return on investment than Oriental Union. In addition to that, Formosa Petrochemical is 1.14 times more volatile than Oriental Union Chemical. It trades about 0.02 of its total potential returns per unit of risk. Oriental Union Chemical is currently generating about 0.09 per unit of volatility. If you would invest  1,540  in Oriental Union Chemical on December 11, 2024 and sell it today you would earn a total of  160.00  from holding Oriental Union Chemical or generate 10.39% 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.  Oriental Union Chemical

Formosa Petrochemical

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Formosa Petrochemical Corp are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.

Oriental Union Chemical

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Oriental Union Chemical are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Oriental Union showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Formosa Petrochemical and Oriental Union

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

The idea behind Formosa Petrochemical Corp and Oriental Union Chemical 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.