Correlation Between Taiwan Weighted and Paradigm

Can any of the company-specific risk be diversified away by investing in both Taiwan Weighted and Paradigm 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 Weighted and Paradigm into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Taiwan Weighted and Paradigm SP GSCI, you can compare the effects of market volatilities on Taiwan Weighted and Paradigm 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 Weighted with a short position of Paradigm. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Weighted and Paradigm.

Diversification Opportunities for Taiwan Weighted and Paradigm

-0.05

Correlation Coefficient

Taiwan Weighted  Paradigm

Good diversification

The 3 months correlation between Taiwan and Paradigm is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and Paradigm SP GSCI in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Paradigm SP GSCI and Taiwan Weighted 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 Weighted are associated (or correlated) with Paradigm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Paradigm SP GSCI has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and Paradigm go up and down completely randomly.

Pair Corralation between Taiwan Weighted and Paradigm

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 7.02 times less return on investment than Paradigm. In addition to that, Taiwan Weighted is 1.05 times more volatile than Paradigm SP GSCI. It trades about 0.04 of its total potential returns per unit of risk. Paradigm SP GSCI is currently generating about 0.28 per unit of volatility. If you would invest  1,901  in Paradigm SP GSCI on October 20, 2024 and sell it today you would earn a total of  152.00  from holding Paradigm SP GSCI or generate 8.0% return on investment over 90 days.

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

Taiwan Weighted  vs.  Paradigm SP GSCI

Pair Trading with Taiwan Weighted and Paradigm

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

The idea behind Taiwan Weighted and Paradigm SP GSCI 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.