Correlation Between Formosa Plastics and China Steel

Can any of the company-specific risk be diversified away by investing in both Formosa Plastics and China Steel 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 Formosa Plastics and China Steel into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Formosa Plastics Corp and China Steel Chemical, you can compare the effects of market volatilities on Formosa Plastics and China Steel 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 Formosa Plastics with a short position of China Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and China Steel.

Diversification Opportunities for Formosa Plastics and China Steel

0.8

Correlation Coefficient

Formosa Plastics  China Steel

Very poor diversification

The 3 months correlation between Formosa and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and China Steel Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel Chemical and Formosa Plastics 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 Formosa Plastics Corp are associated (or correlated) with China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Chemical has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and China Steel go up and down completely randomly.

Pair Corralation between Formosa Plastics and China Steel

Assuming the 90 days trading horizon Formosa Plastics Corp is expected to under-perform the China Steel. In addition to that, Formosa Plastics is 2.2 times more volatile than China Steel Chemical. It trades about -0.12 of its total potential returns per unit of risk. China Steel Chemical is currently generating about -0.03 per unit of volatility. If you would invest  9,920  in China Steel Chemical on September 3, 2024 and sell it today you would lose (210.00) from holding China Steel Chemical or give up 2.12% of portfolio value over 90 days.

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

Formosa Plastics Corp  vs.  China Steel Chemical

Formosa Plastics Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Plastics Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

China Steel Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Steel Chemical has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, China Steel 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 Formosa Plastics and China Steel

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

The idea behind Formosa Plastics Corp and China Steel 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.

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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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.