Correlation Between President Chain and Formosa Chemicals
Can any of the company-specific risk be diversified away by investing in both President Chain and Formosa Chemicals 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 President Chain and Formosa Chemicals into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between President Chain Store and Formosa Chemicals Fibre, you can compare the effects of market volatilities on President Chain and Formosa Chemicals 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 President Chain with a short position of Formosa Chemicals. Check out your portfolio center. Please also check ongoing floating volatility patterns of President Chain and Formosa Chemicals.
Diversification Opportunities for President Chain and Formosa Chemicals
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between President and Formosa is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding President Chain Store and Formosa Chemicals Fibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Chemicals Fibre and President Chain 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 President Chain Store are associated (or correlated) with Formosa Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Chemicals Fibre has no effect on the direction of President Chain i.e., President Chain and Formosa Chemicals go up and down completely randomly.
Pair Corralation between President Chain and Formosa Chemicals
Assuming the 90 days trading horizon President Chain Store is expected to generate 0.3 times more return on investment than Formosa Chemicals. However, President Chain Store is 3.38 times less risky than Formosa Chemicals. It trades about -0.17 of its potential returns per unit of risk. Formosa Chemicals Fibre is currently generating about -0.29 per unit of risk. If you would invest 27,350 in President Chain Store on November 7, 2024 and sell it today you would lose (1,750) from holding President Chain Store or give up 6.4% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
President Chain Store vs. Formosa Chemicals Fibre
Performance |
| Timeline |
| President Chain Store |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| Formosa Chemicals Fibre |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
President Chain and Formosa Chemicals Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with President Chain and Formosa Chemicals
The main advantage of trading using opposite President Chain and Formosa Chemicals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if President Chain position performs unexpectedly, Formosa Chemicals 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 Chemicals will offset losses from the drop in Formosa Chemicals' long position.The idea behind President Chain Store and Formosa Chemicals Fibre 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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