Correlation Between Taiwan Semiconductor and FARO Technologies

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

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

Diversification Opportunities for Taiwan Semiconductor and FARO Technologies

0.13

Correlation Coefficient

Taiwan Semiconductor  FARO Technologies

Average diversification

The 3 months correlation between Taiwan and FARO is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and FARO Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FARO Technologies and Taiwan Semiconductor 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 Semiconductor Manufacturing are associated (or correlated) with FARO Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FARO Technologies has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and FARO Technologies go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and FARO Technologies

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to under-perform the FARO Technologies. But the stock apears to be less risky and, when comparing its historical volatility, Taiwan Semiconductor Manufacturing is 1.32 times less risky than FARO Technologies. The stock trades about -0.06 of its potential returns per unit of risk. The FARO Technologies is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  2,440  in FARO Technologies on December 20, 2024 and sell it today you would earn a total of  220.00  from holding FARO Technologies or generate 9.02% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  FARO Technologies

Taiwan Semiconductor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Taiwan Semiconductor Manufacturing has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

FARO Technologies

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in FARO Technologies are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, FARO Technologies reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Taiwan Semiconductor and FARO Technologies

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

The idea behind Taiwan Semiconductor Manufacturing and FARO Technologies 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.