Correlation Between Taiwan Weighted and VIA Labs

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

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

Diversification Opportunities for Taiwan Weighted and VIA Labs

0.29

Correlation Coefficient

Taiwan Weighted  VIA Labs

Modest diversification

The 3 months correlation between Taiwan and VIA is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and VIA Labs in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VIA Labs 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 VIA Labs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VIA Labs has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and VIA Labs go up and down completely randomly.

Pair Corralation between Taiwan Weighted and VIA Labs

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 0.43 times more return on investment than VIA Labs. However, Taiwan Weighted is 2.31 times less risky than VIA Labs. It trades about 0.08 of its potential returns per unit of risk. VIA Labs is currently generating about -0.03 per unit of risk. If you would invest  1,549,382  in Taiwan Weighted on October 12, 2024 and sell it today you would earn a total of  758,731  from holding Taiwan Weighted or generate 48.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.96%
Values	Daily Returns

Taiwan Weighted  vs.  VIA Labs

Pair Trading with Taiwan Weighted and VIA Labs

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

The idea behind Taiwan Weighted and VIA Labs 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.