Correlation Between Information Technology and Cathay Financial

Can any of the company-specific risk be diversified away by investing in both Information Technology and Cathay Financial 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 Information Technology and Cathay Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Information Technology Total and Cathay Financial Holding, you can compare the effects of market volatilities on Information Technology and Cathay Financial 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 Information Technology with a short position of Cathay Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Information Technology and Cathay Financial.

Diversification Opportunities for Information Technology and Cathay Financial

0.22

Correlation Coefficient

Information Technology  Cathay Financial

Modest diversification

The 3 months correlation between Information and Cathay is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Information Technology Total and Cathay Financial Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Financial Holding and Information Technology 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 Information Technology Total are associated (or correlated) with Cathay Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Financial Holding has no effect on the direction of Information Technology i.e., Information Technology and Cathay Financial go up and down completely randomly.

Pair Corralation between Information Technology and Cathay Financial

Assuming the 90 days trading horizon Information Technology is expected to generate 1.19 times less return on investment than Cathay Financial. In addition to that, Information Technology is 14.3 times more volatile than Cathay Financial Holding. It trades about 0.01 of its total potential returns per unit of risk. Cathay Financial Holding is currently generating about 0.14 per unit of volatility. If you would invest  6,030  in Cathay Financial Holding on September 3, 2024 and sell it today you would earn a total of  80.00  from holding Cathay Financial Holding or generate 1.33% return on investment over 90 days.

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

Information Technology Total  vs.  Cathay Financial Holding

Information Technology

Risk-Adjusted Performance

0 of 100

Very Weak

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

Cathay Financial Holding

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Cathay Financial is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Information Technology and Cathay Financial

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

The idea behind Information Technology Total and Cathay Financial Holding 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.