Correlation Between Formosa International and Gourmet Master

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

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

Diversification Opportunities for Formosa International and Gourmet Master

-0.39

Correlation Coefficient

Formosa International  Gourmet Master

Very good diversification

The 3 months correlation between Formosa and Gourmet is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Formosa International Hotels and Gourmet Master Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gourmet Master and Formosa International 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 International Hotels are associated (or correlated) with Gourmet Master. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gourmet Master has no effect on the direction of Formosa International i.e., Formosa International and Gourmet Master go up and down completely randomly.

Pair Corralation between Formosa International and Gourmet Master

Assuming the 90 days trading horizon Formosa International Hotels is expected to under-perform the Gourmet Master. But the stock apears to be less risky and, when comparing its historical volatility, Formosa International Hotels is 2.08 times less risky than Gourmet Master. The stock trades about -0.12 of its potential returns per unit of risk. The Gourmet Master Co is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  8,190  in Gourmet Master Co on August 31, 2024 and sell it today you would earn a total of  1,180  from holding Gourmet Master Co or generate 14.41% return on investment over 90 days.

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

Formosa International Hotels  vs.  Gourmet Master Co

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.

Gourmet Master

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Gourmet Master Co are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Gourmet Master showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Formosa International and Gourmet Master

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

The idea behind Formosa International Hotels and Gourmet Master Co 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.

Check out your portfolio center.

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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.