Correlation Between Taiwan Cement and Cathay Financial

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

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

Diversification Opportunities for Taiwan Cement and Cathay Financial

0.21

Correlation Coefficient

Taiwan Cement  Cathay Financial

Modest diversification

The 3 months correlation between Taiwan and Cathay is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Cement Corp and Cathay Financial Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Financial Holding and Taiwan Cement 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 Cement Corp are associated (or correlated) with Cathay Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Financial Holding has no effect on the direction of Taiwan Cement i.e., Taiwan Cement and Cathay Financial go up and down completely randomly.

Pair Corralation between Taiwan Cement and Cathay Financial

Assuming the 90 days trading horizon Taiwan Cement Corp is expected to generate 0.72 times more return on investment than Cathay Financial. However, Taiwan Cement Corp is 1.38 times less risky than Cathay Financial. It trades about 0.08 of its potential returns per unit of risk. Cathay Financial Holding is currently generating about 0.05 per unit of risk. If you would invest  3,215  in Taiwan Cement Corp on September 3, 2024 and sell it today you would earn a total of  135.00  from holding Taiwan Cement Corp or generate 4.2% return on investment over 90 days.

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

Taiwan Cement Corp  vs.  Cathay Financial Holding

Taiwan Cement Corp

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Cement Corp are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Taiwan Cement is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Cathay Financial Holding

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Cathay Financial is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Taiwan Cement and Cathay Financial

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

The idea behind Taiwan Cement Corp and Cathay Financial Holding 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.