Correlation Between Cathay Financial and Chang Hwa

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

By analyzing existing cross correlation between Cathay Financial Holding and Chang Hwa Commercial, you can compare the effects of market volatilities on Cathay Financial and Chang 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 Cathay Financial with a short position of Chang Hwa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Financial and Chang Hwa.

Diversification Opportunities for Cathay Financial and Chang Hwa

0.15

Correlation Coefficient

Cathay Financial  Chang Hwa

Average diversification

The 3 months correlation between Cathay and Chang is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Financial Holding and Chang Hwa Commercial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chang Hwa Commercial and Cathay Financial 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 Cathay Financial Holding are associated (or correlated) with Chang Hwa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chang Hwa Commercial has no effect on the direction of Cathay Financial i.e., Cathay Financial and Chang Hwa go up and down completely randomly.

Pair Corralation between Cathay Financial and Chang Hwa

Assuming the 90 days trading horizon Cathay Financial Holding is expected to generate 2.43 times more return on investment than Chang Hwa. However, Cathay Financial is 2.43 times more volatile than Chang Hwa Commercial. It trades about 0.14 of its potential returns per unit of risk. Chang Hwa Commercial is currently generating about 0.04 per unit of risk. If you would invest  6,320  in Cathay Financial Holding on September 17, 2024 and sell it today you would earn a total of  630.00  from holding Cathay Financial Holding or generate 9.97% return on investment over 90 days.

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

Cathay Financial Holding  vs.  Chang Hwa Commercial

Cathay Financial Holding

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Cathay Financial may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Chang Hwa Commercial

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Chang Hwa Commercial are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Chang 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 Cathay Financial and Chang Hwa

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

The idea behind Cathay Financial Holding and Chang Hwa Commercial 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.