Correlation Between Formosan Rubber and Nankang Rubber
Can any of the company-specific risk be diversified away by investing in both Formosan Rubber and Nankang Rubber 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 Formosan Rubber and Nankang Rubber into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Formosan Rubber Group and Nankang Rubber Tire, you can compare the effects of market volatilities on Formosan Rubber and Nankang Rubber 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 Formosan Rubber with a short position of Nankang Rubber. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosan Rubber and Nankang Rubber.
Diversification Opportunities for Formosan Rubber and Nankang Rubber
0.38 | Correlation Coefficient |
Weak diversification
The 3 months correlation between Formosan and Nankang is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Formosan Rubber Group and Nankang Rubber Tire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nankang Rubber Tire and Formosan Rubber 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 Formosan Rubber Group are associated (or correlated) with Nankang Rubber. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nankang Rubber Tire has no effect on the direction of Formosan Rubber i.e., Formosan Rubber and Nankang Rubber go up and down completely randomly.
Pair Corralation between Formosan Rubber and Nankang Rubber
Assuming the 90 days trading horizon Formosan Rubber is expected to generate 1.7 times less return on investment than Nankang Rubber. But when comparing it to its historical volatility, Formosan Rubber Group is 1.63 times less risky than Nankang Rubber. It trades about 0.04 of its potential returns per unit of risk. Nankang Rubber Tire is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 3,500 in Nankang Rubber Tire on November 5, 2024 and sell it today you would earn a total of 1,020 from holding Nankang Rubber Tire or generate 29.14% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Formosan Rubber Group vs. Nankang Rubber Tire
Performance |
| Timeline |
| Formosan Rubber Group |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Weak
| Nankang Rubber Tire |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
Formosan Rubber and Nankang Rubber Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Formosan Rubber and Nankang Rubber
The main advantage of trading using opposite Formosan Rubber and Nankang Rubber positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Formosan Rubber position performs unexpectedly, Nankang Rubber 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 Nankang Rubber will offset losses from the drop in Nankang Rubber's long position.The idea behind Formosan Rubber Group and Nankang Rubber Tire 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.
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