Correlation Between Great China and Formosa Petrochemical

Can any of the company-specific risk be diversified away by investing in both Great China and Formosa Petrochemical 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 Great China and Formosa Petrochemical into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Great China Metal and Formosa Petrochemical Corp, you can compare the effects of market volatilities on Great China and Formosa Petrochemical 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 Great China with a short position of Formosa Petrochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Great China and Formosa Petrochemical.

Diversification Opportunities for Great China and Formosa Petrochemical

0.3

Correlation Coefficient

Great China  Formosa Petrochemical

Weak diversification

The 3 months correlation between Great and Formosa is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Great China Metal and Formosa Petrochemical Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Petrochemical and Great China 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 Great China Metal are associated (or correlated) with Formosa Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Petrochemical has no effect on the direction of Great China i.e., Great China and Formosa Petrochemical go up and down completely randomly.

Pair Corralation between Great China and Formosa Petrochemical

Assuming the 90 days trading horizon Great China Metal is expected to generate 0.19 times more return on investment than Formosa Petrochemical. However, Great China Metal is 5.4 times less risky than Formosa Petrochemical. It trades about 0.04 of its potential returns per unit of risk. Formosa Petrochemical Corp is currently generating about -0.43 per unit of risk. If you would invest  2,295  in Great China Metal on October 6, 2024 and sell it today you would earn a total of  5.00  from holding Great China Metal or generate 0.22% return on investment over 90 days.

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

Great China Metal  vs.  Formosa Petrochemical Corp

Great China Metal

Risk-Adjusted Performance

0 of 100

Very Weak

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

Formosa Petrochemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Petrochemical Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in February 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Great China and Formosa Petrochemical

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

The idea behind Great China Metal and Formosa Petrochemical Corp 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.