Correlation Between Formosa Plastics and Taiwan Speciality
Can any of the company-specific risk be diversified away by investing in both Formosa Plastics and Taiwan Speciality 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 Taiwan Speciality 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 Taiwan Speciality Chemicals, you can compare the effects of market volatilities on Formosa Plastics and Taiwan Speciality 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 Taiwan Speciality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and Taiwan Speciality.
Diversification Opportunities for Formosa Plastics and Taiwan Speciality
-0.45 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Formosa and Taiwan is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and Taiwan Speciality Chemicals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Speciality 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 Taiwan Speciality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Speciality has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and Taiwan Speciality go up and down completely randomly.
Pair Corralation between Formosa Plastics and Taiwan Speciality
Assuming the 90 days trading horizon Formosa Plastics Corp is expected to under-perform the Taiwan Speciality. But the stock apears to be less risky and, when comparing its historical volatility, Formosa Plastics Corp is 1.12 times less risky than Taiwan Speciality. The stock trades about -0.23 of its potential returns per unit of risk. The Taiwan Speciality Chemicals is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 17,300 in Taiwan Speciality Chemicals on November 7, 2024 and sell it today you would earn a total of 7,150 from holding Taiwan Speciality Chemicals or generate 41.33% 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. Taiwan Speciality Chemicals
Performance |
| Timeline |
| Formosa Plastics Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| Taiwan Speciality |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Solid
Formosa Plastics and Taiwan Speciality Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Formosa Plastics and Taiwan Speciality
The main advantage of trading using opposite Formosa Plastics and Taiwan Speciality positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosa Plastics position performs unexpectedly, Taiwan Speciality 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 Taiwan Speciality will offset losses from the drop in Taiwan Speciality's long position.The idea behind Formosa Plastics Corp and Taiwan Speciality Chemicals 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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