Correlation Between Formosa Petrochemical and China Steel
Can any of the company-specific risk be diversified away by investing in both Formosa Petrochemical and China Steel 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 Steel 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 Steel Chemical, you can compare the effects of market volatilities on Formosa Petrochemical and China Steel 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 Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Petrochemical and China Steel.
Diversification Opportunities for Formosa Petrochemical and China Steel
0.88 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Formosa and China is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and China Steel Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel 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 China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Chemical has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and China Steel go up and down completely randomly.
Pair Corralation between Formosa Petrochemical and China Steel
Assuming the 90 days trading horizon Formosa Petrochemical Corp is expected to under-perform the China Steel. In addition to that, Formosa Petrochemical is 2.1 times more volatile than China Steel Chemical. It trades about -0.3 of its total potential returns per unit of risk. China Steel Chemical is currently generating about -0.19 per unit of volatility. If you would invest 10,150 in China Steel Chemical on September 24, 2024 and sell it today you would lose (1,030) from holding China Steel Chemical or give up 10.15% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Strong |
Accuracy | 98.46% |
Values | Daily Returns |
Formosa Petrochemical Corp vs. China Steel Chemical
Performance |
Timeline |
Formosa Petrochemical |
China Steel Chemical |
Formosa Petrochemical and China Steel Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Formosa Petrochemical and China Steel
The main advantage of trading using opposite Formosa Petrochemical and China Steel positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosa Petrochemical position performs unexpectedly, China Steel 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 Steel will offset losses from the drop in China Steel's long position.The idea behind Formosa Petrochemical Corp and China Steel 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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Check out your portfolio center.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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..
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