Correlation Between Taiwan Semiconductor and Micron Technology

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

Diversification Opportunities for Taiwan Semiconductor and Micron Technology

0.89

Correlation Coefficient

Taiwan Semiconductor  Micron Technology

Very poor diversification

The 3 months correlation between Taiwan and Micron is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and Micron Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Micron Technology 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 Micron Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Micron Technology has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and Micron Technology go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and Micron Technology

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to generate 0.78 times more return on investment than Micron Technology. However, Taiwan Semiconductor Manufacturing is 1.28 times less risky than Micron Technology. It trades about 0.17 of its potential returns per unit of risk. Micron Technology is currently generating about 0.1 per unit of risk. If you would invest  11,375  in Taiwan Semiconductor Manufacturing on September 4, 2024 and sell it today you would earn a total of  3,435  from holding Taiwan Semiconductor Manufacturing or generate 30.2% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  Micron Technology

Taiwan Semiconductor

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Taiwan Semiconductor sustained solid returns over the last few months and may actually be approaching a breakup point.

Micron Technology

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Micron Technology are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Micron Technology sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Taiwan Semiconductor and Micron Technology

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

The idea behind Taiwan Semiconductor Manufacturing and Micron Technology 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.