Correlation Between Basic Materials and Taiwan Semiconductor

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

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

Diversification Opportunities for Basic Materials and Taiwan Semiconductor

0.41

Correlation Coefficient

Basic Materials  Taiwan Semiconductor

Very weak diversification

The 3 months correlation between Basic and Taiwan is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor and Basic Materials 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 Basic Materials 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 Basic Materials i.e., Basic Materials and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between Basic Materials and Taiwan Semiconductor

Assuming the 90 days trading horizon Basic Materials is expected to generate 3.85 times less return on investment than Taiwan Semiconductor. But when comparing it to its historical volatility, Basic Materials is 2.16 times less risky than Taiwan Semiconductor. It trades about 0.05 of its potential returns per unit of risk. Taiwan Semiconductor Manufacturing is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  11,818  in Taiwan Semiconductor Manufacturing on August 31, 2024 and sell it today you would earn a total of  1,712  from holding Taiwan Semiconductor Manufacturing or generate 14.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Basic Materials  vs.  Taiwan Semiconductor Manufactu

Pair Trading with Basic Materials and Taiwan Semiconductor

The main advantage of trading using opposite Basic Materials and Taiwan Semiconductor positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials 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 Basic Materials 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.

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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.