Correlation Between Formosa Petrochemical and Formosa Optical
Can any of the company-specific risk be diversified away by investing in both Formosa Petrochemical and Formosa Optical 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 Formosa Optical 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 Formosa Optical Technology, you can compare the effects of market volatilities on Formosa Petrochemical and Formosa Optical 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 Formosa Optical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Petrochemical and Formosa Optical.
Diversification Opportunities for Formosa Petrochemical and Formosa Optical
-0.43 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Formosa and Formosa is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and Formosa Optical Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Optical Tech 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 Formosa Optical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Optical Tech has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and Formosa Optical go up and down completely randomly.
Pair Corralation between Formosa Petrochemical and Formosa Optical
Assuming the 90 days trading horizon Formosa Petrochemical Corp is expected to under-perform the Formosa Optical. In addition to that, Formosa Petrochemical is 1.44 times more volatile than Formosa Optical Technology. It trades about -0.11 of its total potential returns per unit of risk. Formosa Optical Technology is currently generating about 0.29 per unit of volatility. If you would invest 10,600 in Formosa Optical Technology on November 18, 2024 and sell it today you would earn a total of 3,250 from holding Formosa Optical Technology or generate 30.66% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Against |
Strength | Very Weak |
Accuracy | 100.0% |
Values | Daily Returns |
Formosa Petrochemical Corp vs. Formosa Optical Technology
Performance |
Timeline |
Formosa Petrochemical |
Formosa Optical Tech |
Formosa Petrochemical and Formosa Optical Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Formosa Petrochemical and Formosa Optical
The main advantage of trading using opposite Formosa Petrochemical and Formosa Optical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosa Petrochemical position performs unexpectedly, Formosa Optical 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 Formosa Optical will offset losses from the drop in Formosa Optical's long position.Formosa Petrochemical vs. Chung Hwa Food | ||
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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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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