Correlation Between Louisa Professional and Formosa Petrochemical
Can any of the company-specific risk be diversified away by investing in both Louisa Professional and Formosa Petrochemical 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 Louisa Professional and Formosa Petrochemical into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Louisa Professional Coffee and Formosa Petrochemical Corp, you can compare the effects of market volatilities on Louisa Professional and Formosa Petrochemical 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 Louisa Professional with a short position of Formosa Petrochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Louisa Professional and Formosa Petrochemical.
Diversification Opportunities for Louisa Professional and Formosa Petrochemical
0.78 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Louisa and Formosa is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Louisa Professional Coffee and Formosa Petrochemical Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Petrochemical and Louisa Professional 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 Louisa Professional Coffee are associated (or correlated) with Formosa Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Petrochemical has no effect on the direction of Louisa Professional i.e., Louisa Professional and Formosa Petrochemical go up and down completely randomly.
Pair Corralation between Louisa Professional and Formosa Petrochemical
Assuming the 90 days trading horizon Louisa Professional Coffee is expected to generate 0.96 times more return on investment than Formosa Petrochemical. However, Louisa Professional Coffee is 1.04 times less risky than Formosa Petrochemical. It trades about -0.1 of its potential returns per unit of risk. Formosa Petrochemical Corp is currently generating about -0.14 per unit of risk. If you would invest 16,290 in Louisa Professional Coffee on August 31, 2024 and sell it today you would lose (6,460) from holding Louisa Professional Coffee or give up 39.66% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 99.73% |
| Values | Daily Returns |
Louisa Professional Coffee vs. Formosa Petrochemical Corp
Performance |
| Timeline |
| Louisa Professional |
| Formosa Petrochemical |
Louisa Professional and Formosa Petrochemical Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Louisa Professional and Formosa Petrochemical
The main advantage of trading using opposite Louisa Professional and Formosa Petrochemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Louisa Professional position performs unexpectedly, Formosa Petrochemical 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 Petrochemical will offset losses from the drop in Formosa Petrochemical's long position.The idea behind Louisa Professional Coffee and Formosa Petrochemical 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.
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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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.
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