Correlation Between Lian Hwa and Formosa Petrochemical
Can any of the company-specific risk be diversified away by investing in both Lian Hwa and Formosa Petrochemical 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 Lian Hwa and Formosa Petrochemical into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Lian Hwa Foods and Formosa Petrochemical Corp, you can compare the effects of market volatilities on Lian Hwa and Formosa Petrochemical 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 Lian Hwa with a short position of Formosa Petrochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lian Hwa and Formosa Petrochemical.
Diversification Opportunities for Lian Hwa and Formosa Petrochemical
-0.65 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Lian and Formosa is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Lian Hwa Foods and Formosa Petrochemical Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Petrochemical and Lian Hwa 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 Lian Hwa Foods are associated (or correlated) with Formosa Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Petrochemical has no effect on the direction of Lian Hwa i.e., Lian Hwa and Formosa Petrochemical go up and down completely randomly.
Pair Corralation between Lian Hwa and Formosa Petrochemical
Assuming the 90 days trading horizon Lian Hwa Foods is expected to generate 1.0 times more return on investment than Formosa Petrochemical. However, Lian Hwa is 1.0 times more volatile than Formosa Petrochemical Corp. It trades about 0.08 of its potential returns per unit of risk. Formosa Petrochemical Corp is currently generating about -0.1 per unit of risk. If you would invest 7,380 in Lian Hwa Foods on August 30, 2024 and sell it today you would earn a total of 4,620 from holding Lian Hwa Foods or generate 62.6% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Lian Hwa Foods vs. Formosa Petrochemical Corp
Performance |
| Timeline |
| Lian Hwa Foods |
| Formosa Petrochemical |
Lian Hwa and Formosa Petrochemical Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Lian Hwa and Formosa Petrochemical
The main advantage of trading using opposite Lian Hwa and Formosa Petrochemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lian Hwa position performs unexpectedly, Formosa Petrochemical 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 Petrochemical will offset losses from the drop in Formosa Petrochemical's long position.The idea behind Lian Hwa Foods and Formosa Petrochemical Corp 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.| Formosa Petrochemical vs. Hunya Foods Co | Formosa Petrochemical vs. Shan Loong Transportation Co | Formosa Petrochemical vs. Ma Kuang Healthcare | Formosa Petrochemical vs. Lian Hwa Foods |
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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.
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