Correlation Between Cathay TIP and Cathay Dow
Can any of the company-specific risk be diversified away by investing in both Cathay TIP and Cathay Dow 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 Cathay TIP and Cathay Dow into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cathay TIP TAIEX and Cathay Dow Jones, you can compare the effects of market volatilities on Cathay TIP and Cathay Dow 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 Cathay TIP with a short position of Cathay Dow. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay TIP and Cathay Dow.
Diversification Opportunities for Cathay TIP and Cathay Dow
0.64 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Cathay and Cathay is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Cathay TIP TAIEX and Cathay Dow Jones in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Dow Jones and Cathay TIP 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 Cathay TIP TAIEX are associated (or correlated) with Cathay Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Dow Jones has no effect on the direction of Cathay TIP i.e., Cathay TIP and Cathay Dow go up and down completely randomly.
Pair Corralation between Cathay TIP and Cathay Dow
Assuming the 90 days trading horizon Cathay TIP is expected to generate 5.49 times less return on investment than Cathay Dow. But when comparing it to its historical volatility, Cathay TIP TAIEX is 1.35 times less risky than Cathay Dow. It trades about 0.04 of its potential returns per unit of risk. Cathay Dow Jones is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 1,510 in Cathay Dow Jones on September 2, 2024 and sell it today you would earn a total of 115.00 from holding Cathay Dow Jones or generate 7.62% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cathay TIP TAIEX vs. Cathay Dow Jones
Performance |
| Timeline |
| Cathay TIP TAIEX |
| Cathay Dow Jones |
Cathay TIP and Cathay Dow Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cathay TIP and Cathay Dow
The main advantage of trading using opposite Cathay TIP and Cathay Dow positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cathay TIP position performs unexpectedly, Cathay Dow 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 Cathay Dow will offset losses from the drop in Cathay Dow's long position.The idea behind Cathay TIP TAIEX and Cathay Dow Jones 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 Transaction History module to view history of all your transactions and understand their impact on performance.
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