Correlation Between Taiwan Weighted and Formosa Laboratories

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

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

Diversification Opportunities for Taiwan Weighted and Formosa Laboratories

0.34

Correlation Coefficient

Taiwan Weighted  Formosa Laboratories

Weak diversification

The 3 months correlation between Taiwan and Formosa is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and Formosa Laboratories in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Laboratories 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 Formosa Laboratories. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Laboratories has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and Formosa Laboratories go up and down completely randomly.

Pair Corralation between Taiwan Weighted and Formosa Laboratories

Assuming the 90 days trading horizon Taiwan Weighted is expected to under-perform the Formosa Laboratories. But the index apears to be less risky and, when comparing its historical volatility, Taiwan Weighted is 1.38 times less risky than Formosa Laboratories. The index trades about -0.1 of its potential returns per unit of risk. The Formosa Laboratories is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  6,930  in Formosa Laboratories on December 29, 2024 and sell it today you would earn a total of  60.00  from holding Formosa Laboratories or generate 0.87% return on investment over 90 days.

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

Taiwan Weighted  vs.  Formosa Laboratories

Pair Trading with Taiwan Weighted and Formosa Laboratories

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

The idea behind Taiwan Weighted and Formosa Laboratories 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.