Correlation Between Taiwan Weighted and Formosa Optical

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

Diversification Opportunities for Taiwan Weighted and Formosa Optical

0.3

Correlation Coefficient

Taiwan Weighted  Formosa Optical

Weak diversification

The 3 months correlation between Taiwan and Formosa is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and Formosa Optical Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Optical Tech 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 Optical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Optical Tech has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and Formosa Optical go up and down completely randomly.

Pair Corralation between Taiwan Weighted and Formosa Optical

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 1.58 times less return on investment than Formosa Optical. But when comparing it to its historical volatility, Taiwan Weighted is 1.17 times less risky than Formosa Optical. It trades about 0.09 of its potential returns per unit of risk. Formosa Optical Technology is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  5,223  in Formosa Optical Technology on September 24, 2024 and sell it today you would earn a total of  5,727  from holding Formosa Optical Technology or generate 109.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.75%
Values	Daily Returns

Taiwan Weighted  vs.  Formosa Optical Technology

Pair Trading with Taiwan Weighted and Formosa Optical

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

The idea behind Taiwan Weighted and Formosa Optical Technology 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.