Correlation Between Taiwan Semiconductor and NorAm Drilling

Can any of the company-specific risk be diversified away by investing in both Taiwan Semiconductor and NorAm Drilling 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 NorAm Drilling 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 NorAm Drilling AS, you can compare the effects of market volatilities on Taiwan Semiconductor and NorAm Drilling 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 NorAm Drilling. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Semiconductor and NorAm Drilling.

Diversification Opportunities for Taiwan Semiconductor and NorAm Drilling

-0.6

Correlation Coefficient

Taiwan Semiconductor  NorAm Drilling

Excellent diversification

The 3 months correlation between Taiwan and NorAm is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and NorAm Drilling AS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NorAm Drilling AS 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 NorAm Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NorAm Drilling AS has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and NorAm Drilling go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and NorAm Drilling

Assuming the 90 days trading horizon Taiwan Semiconductor is expected to generate 3.13 times less return on investment than NorAm Drilling. But when comparing it to its historical volatility, Taiwan Semiconductor Manufacturing is 4.87 times less risky than NorAm Drilling. It trades about 0.09 of its potential returns per unit of risk. NorAm Drilling AS is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  126.00  in NorAm Drilling AS on October 5, 2024 and sell it today you would earn a total of  151.00  from holding NorAm Drilling AS or generate 119.84% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  NorAm Drilling AS

Taiwan Semiconductor

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Taiwan Semiconductor Manufacturing has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly uncertain technical and fundamental indicators, Taiwan Semiconductor reported solid returns over the last few months and may actually be approaching a breakup point.

NorAm Drilling AS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NorAm Drilling AS has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Taiwan Semiconductor and NorAm Drilling

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

The idea behind Taiwan Semiconductor Manufacturing and NorAm Drilling AS 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.