Correlation Between Taiwan Hon and Great China

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

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

Diversification Opportunities for Taiwan Hon and Great China

0.83

Correlation Coefficient

Taiwan Hon  Great China

Very poor diversification

The 3 months correlation between Taiwan and Great is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Hon Chuan and Great China Metal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Great China Metal and Taiwan Hon 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 Hon Chuan are associated (or correlated) with Great China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Great China Metal has no effect on the direction of Taiwan Hon i.e., Taiwan Hon and Great China go up and down completely randomly.

Pair Corralation between Taiwan Hon and Great China

Assuming the 90 days trading horizon Taiwan Hon Chuan is expected to generate 2.75 times more return on investment than Great China. However, Taiwan Hon is 2.75 times more volatile than Great China Metal. It trades about 0.16 of its potential returns per unit of risk. Great China Metal is currently generating about 0.19 per unit of risk. If you would invest  14,900  in Taiwan Hon Chuan on December 4, 2024 and sell it today you would earn a total of  1,700  from holding Taiwan Hon Chuan or generate 11.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.21%
Values	Daily Returns

Taiwan Hon Chuan  vs.  Great China Metal

Taiwan Hon Chuan

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Hon Chuan are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Taiwan Hon showed solid returns over the last few months and may actually be approaching a breakup point.

Great China Metal

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Great China Metal are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. 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.

Pair Trading with Taiwan Hon and Great China

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

The idea behind Taiwan Hon Chuan and Great China Metal 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.