Correlation Between Taiwan Weighted and CTBC Emerging

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

By analyzing existing cross correlation between Taiwan Weighted and CTBC Emerging Asia, you can compare the effects of market volatilities on Taiwan Weighted and CTBC Emerging 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 CTBC Emerging. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Weighted and CTBC Emerging.

Diversification Opportunities for Taiwan Weighted and CTBC Emerging

-0.09

Correlation Coefficient

Taiwan Weighted  CTBC Emerging

Good diversification

The 3 months correlation between Taiwan and CTBC is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and CTBC Emerging Asia in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CTBC Emerging Asia 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 CTBC Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CTBC Emerging Asia has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and CTBC Emerging go up and down completely randomly.

Pair Corralation between Taiwan Weighted and CTBC Emerging

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 2.24 times more return on investment than CTBC Emerging. However, Taiwan Weighted is 2.24 times more volatile than CTBC Emerging Asia. It trades about 0.02 of its potential returns per unit of risk. CTBC Emerging Asia is currently generating about -0.06 per unit of risk. If you would invest  2,334,845  in Taiwan Weighted on October 25, 2024 and sell it today you would earn a total of  17,696  from holding Taiwan Weighted or generate 0.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

Taiwan Weighted  vs.  CTBC Emerging Asia

Pair Trading with Taiwan Weighted and CTBC Emerging

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

The idea behind Taiwan Weighted and CTBC Emerging Asia 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.