Correlation Between Taiwan Fu and Formosa Petrochemical

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

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

Diversification Opportunities for Taiwan Fu and Formosa Petrochemical

0.73

Correlation Coefficient

Taiwan Fu  Formosa Petrochemical

Poor diversification

The 3 months correlation between Taiwan and Formosa is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Fu Hsing and Formosa Petrochemical Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Petrochemical and Taiwan Fu 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 Fu Hsing 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 Taiwan Fu i.e., Taiwan Fu and Formosa Petrochemical go up and down completely randomly.

Pair Corralation between Taiwan Fu and Formosa Petrochemical

Assuming the 90 days trading horizon Taiwan Fu is expected to generate 2.17 times less return on investment than Formosa Petrochemical. But when comparing it to its historical volatility, Taiwan Fu Hsing is 3.92 times less risky than Formosa Petrochemical. It trades about 0.14 of its potential returns per unit of risk. Formosa Petrochemical Corp is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,530  in Formosa Petrochemical Corp on December 25, 2024 and sell it today you would earn a total of  335.00  from holding Formosa Petrochemical Corp or generate 9.49% return on investment over 90 days.

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

Taiwan Fu Hsing  vs.  Formosa Petrochemical Corp

Taiwan Fu Hsing

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Fu Hsing are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Taiwan Fu 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

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Formosa Petrochemical Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Formosa Petrochemical may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Taiwan Fu and Formosa Petrochemical

The main advantage of trading using opposite Taiwan Fu and Formosa Petrochemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Taiwan Fu 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 Taiwan Fu Hsing 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.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.