Correlation Between China Bills and Taiwan Fire

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

By analyzing existing cross correlation between China Bills Finance and Taiwan Fire Marine, you can compare the effects of market volatilities on China Bills and Taiwan Fire 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 Bills with a short position of Taiwan Fire. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Bills and Taiwan Fire.

Diversification Opportunities for China Bills and Taiwan Fire

0.75

Correlation Coefficient

China Bills  Taiwan Fire

Poor diversification

The 3 months correlation between China and Taiwan is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding China Bills Finance and Taiwan Fire Marine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Fire Marine and China Bills 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 Bills Finance are associated (or correlated) with Taiwan Fire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Fire Marine has no effect on the direction of China Bills i.e., China Bills and Taiwan Fire go up and down completely randomly.

Pair Corralation between China Bills and Taiwan Fire

Assuming the 90 days trading horizon China Bills is expected to generate 3.03 times less return on investment than Taiwan Fire. But when comparing it to its historical volatility, China Bills Finance is 1.35 times less risky than Taiwan Fire. It trades about 0.08 of its potential returns per unit of risk. Taiwan Fire Marine is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  2,800  in Taiwan Fire Marine on September 16, 2024 and sell it today you would earn a total of  145.00  from holding Taiwan Fire Marine or generate 5.18% return on investment over 90 days.

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

China Bills Finance  vs.  Taiwan Fire Marine

China Bills Finance

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Bills Finance are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, China Bills is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Taiwan Fire Marine

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Fire Marine are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Taiwan Fire 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 Bills and Taiwan Fire

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

The idea behind China Bills Finance and Taiwan Fire Marine 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.