Correlation Between Formosa International and Chung Hwa

Can any of the company-specific risk be diversified away by investing in both Formosa International and Chung 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 Formosa International and Chung Hwa 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 Chung Hwa Food, you can compare the effects of market volatilities on Formosa International and Chung 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 Formosa International with a short position of Chung Hwa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa International and Chung Hwa.

Diversification Opportunities for Formosa International and Chung Hwa

0.65

Correlation Coefficient

Formosa International  Chung Hwa

Poor diversification

The 3 months correlation between Formosa and Chung is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Formosa International Hotels and Chung Hwa Food in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chung Hwa Food 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 Chung Hwa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chung Hwa Food has no effect on the direction of Formosa International i.e., Formosa International and Chung Hwa go up and down completely randomly.

Pair Corralation between Formosa International and Chung Hwa

Assuming the 90 days trading horizon Formosa International Hotels is expected to under-perform the Chung Hwa. In addition to that, Formosa International is 2.25 times more volatile than Chung Hwa Food. It trades about -0.11 of its total potential returns per unit of risk. Chung Hwa Food is currently generating about -0.12 per unit of volatility. If you would invest  9,020  in Chung Hwa Food on September 21, 2024 and sell it today you would lose (250.00) from holding Chung Hwa Food or give up 2.77% of portfolio value over 90 days.

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

Formosa International Hotels  vs.  Chung Hwa Food

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.

Chung Hwa Food

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Formosa International Hotels and Chung Hwa Food 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.