Correlation Between Formosa Plastics and China
Can any of the company-specific risk be diversified away by investing in both Formosa Plastics and China 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 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 Motor Corp, you can compare the effects of market volatilities on Formosa Plastics and China 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. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and China.
Diversification Opportunities for Formosa Plastics and China
-0.53 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Formosa and China is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and China Motor Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Motor Corp 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. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Motor Corp has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and China go up and down completely randomly.
Pair Corralation between Formosa Plastics and China
Assuming the 90 days trading horizon Formosa Plastics Corp is expected to generate 2.11 times more return on investment than China. However, Formosa Plastics is 2.11 times more volatile than China Motor Corp. It trades about 0.02 of its potential returns per unit of risk. China Motor Corp is currently generating about -0.03 per unit of risk. If you would invest 3,625 in Formosa Plastics Corp on November 5, 2024 and sell it today you would earn a total of 0.00 from holding Formosa Plastics Corp or generate 0.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Formosa Plastics Corp vs. China Motor Corp
Performance |
| Timeline |
| Formosa Plastics Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| China Motor Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
OK
Formosa Plastics and China Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Formosa Plastics and China
The main advantage of trading using opposite Formosa Plastics and China positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosa Plastics position performs unexpectedly, China 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 will offset losses from the drop in China's long position.The idea behind Formosa Plastics Corp and China Motor 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.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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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