Correlation Between CVS Health and Taiwan Semiconductor

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

By analyzing existing cross correlation between CVS Health and Taiwan Semiconductor Manufacturing, you can compare the effects of market volatilities on CVS Health and Taiwan Semiconductor 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 CVS Health with a short position of Taiwan Semiconductor. Check out your portfolio center. Please also check ongoing floating volatility patterns of CVS Health and Taiwan Semiconductor.

Diversification Opportunities for CVS Health and Taiwan Semiconductor

0.07

Correlation Coefficient

CVS Health  Taiwan Semiconductor

Significant diversification

The 3 months correlation between CVS and Taiwan is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding CVS Health and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor and CVS Health 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 CVS Health are associated (or correlated) with Taiwan Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Semiconductor has no effect on the direction of CVS Health i.e., CVS Health and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between CVS Health and Taiwan Semiconductor

Assuming the 90 days trading horizon CVS Health is expected to generate 0.86 times more return on investment than Taiwan Semiconductor. However, CVS Health is 1.16 times less risky than Taiwan Semiconductor. It trades about -0.03 of its potential returns per unit of risk. Taiwan Semiconductor Manufacturing is currently generating about -0.03 per unit of risk. If you would invest  113,000  in CVS Health on September 12, 2024 and sell it today you would lose (2,000) from holding CVS Health or give up 1.77% of portfolio value over 90 days.

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

CVS Health  vs.  Taiwan Semiconductor Manufactu

CVS Health

Risk-Adjusted Performance

0 of 100

Weak

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

Taiwan Semiconductor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Taiwan Semiconductor showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CVS Health and Taiwan Semiconductor

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

The idea behind CVS Health and Taiwan Semiconductor Manufacturing 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.