Correlation Between China and Formosa Plastics
Can any of the company-specific risk be diversified away by investing in both China 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 China and Formosa Plastics into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between China Motor Corp and Formosa Plastics Corp, you can compare the effects of market volatilities on China 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 China with a short position of Formosa Plastics. Check out your portfolio center. Please also check ongoing floating volatility patterns of China and Formosa Plastics.
Diversification Opportunities for China and Formosa Plastics
-0.17 | Correlation Coefficient |
Good diversification
The 3 months correlation between China and Formosa is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding China Motor Corp 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 China 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 China Motor Corp 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 China i.e., China and Formosa Plastics go up and down completely randomly.
Pair Corralation between China and Formosa Plastics
Assuming the 90 days trading horizon China Motor Corp is expected to under-perform the Formosa Plastics. But the stock apears to be less risky and, when comparing its historical volatility, China Motor Corp is 2.11 times less risky than Formosa Plastics. The stock trades about -0.03 of its potential returns per unit of risk. The Formosa Plastics Corp is currently generating about 0.02 of returns per unit of risk over similar time horizon. 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 | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
China Motor Corp vs. Formosa Plastics Corp
Performance |
| Timeline |
| China Motor Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
OK
| Formosa Plastics Corp |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
China and Formosa Plastics Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with China and Formosa Plastics
The main advantage of trading using opposite China and Formosa Plastics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China 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 China Motor Corp 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.
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