Correlation Between Taiwan Steel and New Era

Can any of the company-specific risk be diversified away by investing in both Taiwan Steel and New Era 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 Taiwan Steel and New Era into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Taiwan Steel Union and New Era Electronics, you can compare the effects of market volatilities on Taiwan Steel and New Era 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 Taiwan Steel with a short position of New Era. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Steel and New Era.

Diversification Opportunities for Taiwan Steel and New Era

0.73

Correlation Coefficient

Taiwan Steel  New Era

Poor diversification

The 3 months correlation between Taiwan and New is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Steel Union and New Era Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Era Electronics and Taiwan Steel 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 Taiwan Steel Union are associated (or correlated) with New Era. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Era Electronics has no effect on the direction of Taiwan Steel i.e., Taiwan Steel and New Era go up and down completely randomly.

Pair Corralation between Taiwan Steel and New Era

Assuming the 90 days trading horizon Taiwan Steel Union is expected to generate 0.38 times more return on investment than New Era. However, Taiwan Steel Union is 2.61 times less risky than New Era. It trades about 0.05 of its potential returns per unit of risk. New Era Electronics is currently generating about -0.02 per unit of risk. If you would invest  11,500  in Taiwan Steel Union on December 21, 2024 and sell it today you would earn a total of  400.00  from holding Taiwan Steel Union or generate 3.48% return on investment over 90 days.

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

Taiwan Steel Union  vs.  New Era Electronics

Taiwan Steel Union

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Steel Union are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Taiwan Steel is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

New Era Electronics

Risk-Adjusted Performance

Very Weak

Over the last 90 days New Era Electronics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, New Era 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 Taiwan Steel and New Era

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

The idea behind Taiwan Steel Union and New Era Electronics 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.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.