Correlation Between Tung Ho and Formosa Plastics
Can any of the company-specific risk be diversified away by investing in both Tung Ho and Formosa Plastics 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 Tung Ho and Formosa Plastics into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tung Ho Steel and Formosa Plastics Corp, you can compare the effects of market volatilities on Tung Ho and Formosa Plastics 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 Tung Ho with a short position of Formosa Plastics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tung Ho and Formosa Plastics.
Diversification Opportunities for Tung Ho and Formosa Plastics
0.79 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Tung and Formosa is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Tung Ho Steel and Formosa Plastics Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Plastics Corp and Tung Ho 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 Tung Ho Steel are associated (or correlated) with Formosa Plastics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Plastics Corp has no effect on the direction of Tung Ho i.e., Tung Ho and Formosa Plastics go up and down completely randomly.
Pair Corralation between Tung Ho and Formosa Plastics
Assuming the 90 days trading horizon Tung Ho Steel is expected to generate 1.05 times more return on investment than Formosa Plastics. However, Tung Ho is 1.05 times more volatile than Formosa Plastics Corp. It trades about 0.05 of its potential returns per unit of risk. Formosa Plastics Corp is currently generating about -0.12 per unit of risk. If you would invest 5,220 in Tung Ho Steel on September 3, 2024 and sell it today you would earn a total of 1,830 from holding Tung Ho Steel or generate 35.06% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Tung Ho Steel vs. Formosa Plastics Corp
Performance |
| Timeline |
| Tung Ho Steel |
| Formosa Plastics Corp |
Tung Ho and Formosa Plastics Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tung Ho and Formosa Plastics
The main advantage of trading using opposite Tung Ho and Formosa Plastics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tung Ho position performs unexpectedly, Formosa Plastics 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 Plastics will offset losses from the drop in Formosa Plastics' long position.The idea behind Tung Ho Steel and Formosa Plastics 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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