Correlation Between Taiwan Semiconductor and Novartis

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

Diversification Opportunities for Taiwan Semiconductor and Novartis

-0.26

Correlation Coefficient

Taiwan Semiconductor  Novartis

Very good diversification

The 3 months correlation between Taiwan and Novartis is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and Novartis AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Novartis AG 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 Novartis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Novartis AG has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and Novartis go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and Novartis

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to generate 1.57 times more return on investment than Novartis. However, Taiwan Semiconductor is 1.57 times more volatile than Novartis AG. It trades about 0.13 of its potential returns per unit of risk. Novartis AG is currently generating about -0.06 per unit of risk. If you would invest  11,953  in Taiwan Semiconductor Manufacturing on September 13, 2024 and sell it today you would earn a total of  2,607  from holding Taiwan Semiconductor Manufacturing or generate 21.81% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  Novartis AG

Taiwan Semiconductor

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 10 (%) 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.

Novartis AG

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Novartis AG has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Taiwan Semiconductor and Novartis

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

The idea behind Taiwan Semiconductor Manufacturing and Novartis AG 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.