Correlation Between Taiwan Semiconductor and United Airlines

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

Diversification Opportunities for Taiwan Semiconductor and United Airlines

0.7

Correlation Coefficient

Taiwan Semiconductor  United Airlines

Poor diversification

The 3 months correlation between Taiwan and United is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and United Airlines Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Airlines Holdings 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 United Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Airlines Holdings has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and United Airlines go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and United Airlines

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to under-perform the United Airlines. In addition to that, Taiwan Semiconductor is 1.3 times more volatile than United Airlines Holdings. It trades about -0.06 of its total potential returns per unit of risk. United Airlines Holdings is currently generating about -0.07 per unit of volatility. If you would invest  30,990  in United Airlines Holdings on December 5, 2024 and sell it today you would lose (3,511) from holding United Airlines Holdings or give up 11.33% of portfolio value over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  United Airlines Holdings

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 weak performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

United Airlines Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days United Airlines Holdings 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 United Airlines

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

The idea behind Taiwan Semiconductor Manufacturing and United Airlines Holdings 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.