Correlation Between Cathay Taiwan and Information Technology

Can any of the company-specific risk be diversified away by investing in both Cathay Taiwan and Information Technology 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 Cathay Taiwan and Information Technology into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cathay Taiwan 5G and Information Technology Total, you can compare the effects of market volatilities on Cathay Taiwan and Information Technology 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 Cathay Taiwan with a short position of Information Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Taiwan and Information Technology.

Diversification Opportunities for Cathay Taiwan and Information Technology

0.67

Correlation Coefficient

Cathay Taiwan  Information Technology

Poor diversification

The 3 months correlation between Cathay and Information is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Taiwan 5G and Information Technology Total in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Information Technology and Cathay Taiwan 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 Cathay Taiwan 5G are associated (or correlated) with Information Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Information Technology has no effect on the direction of Cathay Taiwan i.e., Cathay Taiwan and Information Technology go up and down completely randomly.

Pair Corralation between Cathay Taiwan and Information Technology

Assuming the 90 days trading horizon Cathay Taiwan 5G is expected to generate 0.58 times more return on investment than Information Technology. However, Cathay Taiwan 5G is 1.73 times less risky than Information Technology. It trades about 0.12 of its potential returns per unit of risk. Information Technology Total is currently generating about 0.03 per unit of risk. If you would invest  2,209  in Cathay Taiwan 5G on September 4, 2024 and sell it today you would earn a total of  177.00  from holding Cathay Taiwan 5G or generate 8.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	93.65%
Values	Daily Returns

Cathay Taiwan 5G  vs.  Information Technology Total

Cathay Taiwan 5G

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Taiwan 5G are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, Cathay Taiwan may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Information Technology

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Information Technology Total are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Information Technology is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Cathay Taiwan and Information Technology

The main advantage of trading using opposite Cathay Taiwan and Information Technology positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cathay Taiwan position performs unexpectedly, Information Technology 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 Information Technology will offset losses from the drop in Information Technology's long position.

The idea behind Cathay Taiwan 5G and Information Technology Total 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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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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.