Correlation Between China Airlines and Formosa International

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

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

Diversification Opportunities for China Airlines and Formosa International

-0.69

Correlation Coefficient

China Airlines  Formosa International

Excellent diversification

The 3 months correlation between China and Formosa is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding China Airlines and Formosa International Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa International and China Airlines 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 China Airlines are associated (or correlated) with Formosa International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa International has no effect on the direction of China Airlines i.e., China Airlines and Formosa International go up and down completely randomly.

Pair Corralation between China Airlines and Formosa International

Assuming the 90 days trading horizon China Airlines is expected to generate 1.55 times more return on investment than Formosa International. However, China Airlines is 1.55 times more volatile than Formosa International Hotels. It trades about 0.21 of its potential returns per unit of risk. Formosa International Hotels is currently generating about -0.12 per unit of risk. If you would invest  2,085  in China Airlines on August 31, 2024 and sell it today you would earn a total of  380.00  from holding China Airlines or generate 18.23% return on investment over 90 days.

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

China Airlines  vs.  Formosa International Hotels

China Airlines

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Airlines are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Formosa International

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind China Airlines and Formosa International Hotels 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.