Correlation Between Taiwan Semiconductor and SMA Solar

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

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

Diversification Opportunities for Taiwan Semiconductor and SMA Solar

-0.51

Correlation Coefficient

Taiwan Semiconductor  SMA Solar

Excellent diversification

The 3 months correlation between Taiwan and SMA is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and SMA Solar Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SMA Solar Technology and Taiwan Semiconductor 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 Semiconductor Manufacturing are associated (or correlated) with SMA Solar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SMA Solar Technology has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and SMA Solar go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and SMA Solar

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to generate 0.73 times more return on investment than SMA Solar. However, Taiwan Semiconductor Manufacturing is 1.37 times less risky than SMA Solar. It trades about 0.09 of its potential returns per unit of risk. SMA Solar Technology is currently generating about -0.08 per unit of risk. If you would invest  16,980  in Taiwan Semiconductor Manufacturing on September 14, 2024 and sell it today you would earn a total of  2,315  from holding Taiwan Semiconductor Manufacturing or generate 13.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Taiwan Semiconductor Manufactu  vs.  SMA Solar Technology

Taiwan Semiconductor

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Taiwan Semiconductor disclosed solid returns over the last few months and may actually be approaching a breakup point.

SMA Solar Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SMA Solar Technology has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Taiwan Semiconductor and SMA Solar

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

The idea behind Taiwan Semiconductor Manufacturing and SMA Solar Technology 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.