Correlation Between Taiwan Fertilizer and Lien Hwa

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

By analyzing existing cross correlation between Taiwan Fertilizer Co and Lien Hwa Industrial, you can compare the effects of market volatilities on Taiwan Fertilizer and Lien Hwa 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 Fertilizer with a short position of Lien Hwa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Fertilizer and Lien Hwa.

Diversification Opportunities for Taiwan Fertilizer and Lien Hwa

0.9

Correlation Coefficient

Taiwan Fertilizer  Lien Hwa

Almost no diversification

The 3 months correlation between Taiwan and Lien is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Fertilizer Co and Lien Hwa Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lien Hwa Industrial and Taiwan Fertilizer 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 Fertilizer Co are associated (or correlated) with Lien Hwa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lien Hwa Industrial has no effect on the direction of Taiwan Fertilizer i.e., Taiwan Fertilizer and Lien Hwa go up and down completely randomly.

Pair Corralation between Taiwan Fertilizer and Lien Hwa

Assuming the 90 days trading horizon Taiwan Fertilizer Co is expected to generate 0.99 times more return on investment than Lien Hwa. However, Taiwan Fertilizer Co is 1.01 times less risky than Lien Hwa. It trades about -0.18 of its potential returns per unit of risk. Lien Hwa Industrial is currently generating about -0.21 per unit of risk. If you would invest  5,800  in Taiwan Fertilizer Co on September 26, 2024 and sell it today you would lose (650.00) from holding Taiwan Fertilizer Co or give up 11.21% of portfolio value over 90 days.

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

Taiwan Fertilizer Co  vs.  Lien Hwa Industrial

Taiwan Fertilizer

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Taiwan Fertilizer Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Lien Hwa Industrial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lien Hwa Industrial 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.

Pair Trading with Taiwan Fertilizer and Lien Hwa

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

The idea behind Taiwan Fertilizer Co and Lien Hwa Industrial 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.