Correlation Between Taiwan Weighted and InnoDisk

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

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

Diversification Opportunities for Taiwan Weighted and InnoDisk

-0.02

Correlation Coefficient

Taiwan Weighted  InnoDisk

Good diversification

The 3 months correlation between Taiwan and InnoDisk is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and InnoDisk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on InnoDisk 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 InnoDisk. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of InnoDisk has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and InnoDisk go up and down completely randomly.

Pair Corralation between Taiwan Weighted and InnoDisk

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 0.45 times more return on investment than InnoDisk. However, Taiwan Weighted is 2.22 times less risky than InnoDisk. It trades about 0.09 of its potential returns per unit of risk. InnoDisk is currently generating about 0.03 per unit of risk. If you would invest  1,492,701  in Taiwan Weighted on October 5, 2024 and sell it today you would earn a total of  790,505  from holding Taiwan Weighted or generate 52.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.95%
Values	Daily Returns

Taiwan Weighted  vs.  InnoDisk

Pair Trading with Taiwan Weighted and InnoDisk

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

The idea behind Taiwan Weighted and InnoDisk 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.