Correlation Between Taiwan Fu and Prime Oil
Can any of the company-specific risk be diversified away by investing in both Taiwan Fu and Prime Oil 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 Taiwan Fu and Prime Oil into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Taiwan Fu Hsing and Prime Oil Chemical, you can compare the effects of market volatilities on Taiwan Fu and Prime Oil 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 Taiwan Fu with a short position of Prime Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Fu and Prime Oil.
Diversification Opportunities for Taiwan Fu and Prime Oil
Very poor diversification
The 3 months correlation between Taiwan and Prime is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Fu Hsing and Prime Oil Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prime Oil Chemical and Taiwan Fu 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 Taiwan Fu Hsing are associated (or correlated) with Prime Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prime Oil Chemical has no effect on the direction of Taiwan Fu i.e., Taiwan Fu and Prime Oil go up and down completely randomly.
Pair Corralation between Taiwan Fu and Prime Oil
Assuming the 90 days trading horizon Taiwan Fu Hsing is expected to under-perform the Prime Oil. In addition to that, Taiwan Fu is 3.65 times more volatile than Prime Oil Chemical. It trades about -0.03 of its total potential returns per unit of risk. Prime Oil Chemical is currently generating about -0.09 per unit of volatility. If you would invest 1,825 in Prime Oil Chemical on November 6, 2024 and sell it today you would lose (40.00) from holding Prime Oil Chemical or give up 2.19% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Taiwan Fu Hsing vs. Prime Oil Chemical
Performance |
| Timeline |
| Taiwan Fu Hsing |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
| Prime Oil Chemical |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
Taiwan Fu and Prime Oil Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Taiwan Fu and Prime Oil
The main advantage of trading using opposite Taiwan Fu and Prime Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Taiwan Fu position performs unexpectedly, Prime Oil 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 Prime Oil will offset losses from the drop in Prime Oil's long position.The idea behind Taiwan Fu Hsing and Prime Oil Chemical 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.
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