Correlation Between Formosa Plastics and Formosa Petrochemical

Can any of the company-specific risk be diversified away by investing in both Formosa Plastics and Formosa Petrochemical 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 Formosa Petrochemical 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 Formosa Petrochemical Corp, you can compare the effects of market volatilities on Formosa Plastics and Formosa Petrochemical 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 Formosa Petrochemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Plastics and Formosa Petrochemical.

Diversification Opportunities for Formosa Plastics and Formosa Petrochemical

0.86

Correlation Coefficient

Formosa Plastics  Formosa Petrochemical

Very poor diversification

The 3 months correlation between Formosa and Formosa is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Plastics Corp and Formosa Petrochemical Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Petrochemical 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 Formosa Petrochemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Petrochemical has no effect on the direction of Formosa Plastics i.e., Formosa Plastics and Formosa Petrochemical go up and down completely randomly.

Pair Corralation between Formosa Plastics and Formosa Petrochemical

Assuming the 90 days trading horizon Formosa Plastics Corp is expected to generate 1.12 times more return on investment than Formosa Petrochemical. However, Formosa Plastics is 1.12 times more volatile than Formosa Petrochemical Corp. It trades about -0.13 of its potential returns per unit of risk. Formosa Petrochemical Corp is currently generating about -0.21 per unit of risk. If you would invest  5,050  in Formosa Plastics Corp on August 31, 2024 and sell it today you would lose (915.00) from holding Formosa Plastics Corp or give up 18.12% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Formosa Plastics Corp  vs.  Formosa Petrochemical Corp

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 December 2024. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Formosa Petrochemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Petrochemical 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 December 2024. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Formosa Plastics and Formosa Petrochemical

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

The idea behind Formosa Plastics Corp and Formosa Petrochemical Corp 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.