Correlation Between Taiwan Semiconductor and Monolithic Power

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

Diversification Opportunities for Taiwan Semiconductor and Monolithic Power

0.49

Correlation Coefficient

Taiwan Semiconductor  Monolithic Power

Very weak diversification

The 3 months correlation between Taiwan and Monolithic is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and Monolithic Power Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Monolithic Power Systems 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 Monolithic Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Monolithic Power Systems has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and Monolithic Power go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and Monolithic Power

Considering the 90-day investment horizon Taiwan Semiconductor Manufacturing is expected to under-perform the Monolithic Power. But the stock apears to be less risky and, when comparing its historical volatility, Taiwan Semiconductor Manufacturing is 1.09 times less risky than Monolithic Power. The stock trades about -0.02 of its potential returns per unit of risk. The Monolithic Power Systems is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  57,915  in Monolithic Power Systems on December 2, 2024 and sell it today you would earn a total of  3,186  from holding Monolithic Power Systems or generate 5.5% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  Monolithic Power Systems

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. In spite of very healthy basic indicators, Taiwan Semiconductor is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Monolithic Power Systems

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Monolithic Power Systems are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, Monolithic Power may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Taiwan Semiconductor and Monolithic Power

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

The idea behind Taiwan Semiconductor Manufacturing and Monolithic Power Systems 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.