Correlation Between Formosa Plastics and China Steel
Can any of the company-specific risk be diversified away by investing in both Formosa Plastics and China Steel 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 Formosa Plastics and China Steel into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Formosa Plastics Corp and China Steel Chemical, you can compare the effects of market volatilities on Formosa Plastics and China Steel 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 Formosa Plastics with a short position of China Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and China Steel.
Diversification Opportunities for Formosa Plastics and China Steel
0.9 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Formosa and China is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and China Steel Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel Chemical and Formosa Plastics 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 Formosa Plastics Corp are associated (or correlated) with China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Chemical has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and China Steel go up and down completely randomly.
Pair Corralation between Formosa Plastics and China Steel
Assuming the 90 days trading horizon Formosa Plastics Corp is expected to generate 3.72 times more return on investment than China Steel. However, Formosa Plastics is 3.72 times more volatile than China Steel Chemical. It trades about 0.08 of its potential returns per unit of risk. China Steel Chemical is currently generating about -0.01 per unit of risk. If you would invest 3,490 in Formosa Plastics Corp on November 3, 2024 and sell it today you would earn a total of 135.00 from holding Formosa Plastics Corp or generate 3.87% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Formosa Plastics Corp vs. China Steel Chemical
Performance |
| Timeline |
| Formosa Plastics Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| China Steel Chemical |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
Formosa Plastics and China Steel Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Formosa Plastics and China Steel
The main advantage of trading using opposite Formosa Plastics and China Steel positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosa Plastics position performs unexpectedly, China Steel 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 China Steel will offset losses from the drop in China Steel's long position.The idea behind Formosa Plastics Corp and China Steel Chemical 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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