Correlation Between Taiwan Weighted and Wafer Works

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

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

Diversification Opportunities for Taiwan Weighted and Wafer Works

0.33

Correlation Coefficient

Taiwan Weighted  Wafer Works

Weak diversification

The 3 months correlation between Taiwan and Wafer is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and Wafer Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wafer Works 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 Wafer Works. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wafer Works has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and Wafer Works go up and down completely randomly.

Pair Corralation between Taiwan Weighted and Wafer Works

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 0.55 times more return on investment than Wafer Works. However, Taiwan Weighted is 1.82 times less risky than Wafer Works. It trades about -0.1 of its potential returns per unit of risk. Wafer Works is currently generating about -0.12 per unit of risk. If you would invest  2,319,020  in Taiwan Weighted on December 30, 2024 and sell it today you would lose (158,731) from holding Taiwan Weighted or give up 6.84% of portfolio value over 90 days.

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

Taiwan Weighted  vs.  Wafer Works

Pair Trading with Taiwan Weighted and Wafer Works

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

The idea behind Taiwan Weighted and Wafer Works 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.