Correlation Between ABC Taiwan and Hon Hai

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

By analyzing existing cross correlation between ABC Taiwan Electronics and Hon Hai Precision, you can compare the effects of market volatilities on ABC Taiwan and Hon Hai 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 ABC Taiwan with a short position of Hon Hai. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABC Taiwan and Hon Hai.

Diversification Opportunities for ABC Taiwan and Hon Hai

0.76

Correlation Coefficient

ABC Taiwan  Hon Hai

Poor diversification

The 3 months correlation between ABC and Hon is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding ABC Taiwan Electronics and Hon Hai Precision in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hon Hai Precision and ABC Taiwan 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 ABC Taiwan Electronics are associated (or correlated) with Hon Hai. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hon Hai Precision has no effect on the direction of ABC Taiwan i.e., ABC Taiwan and Hon Hai go up and down completely randomly.

Pair Corralation between ABC Taiwan and Hon Hai

Assuming the 90 days trading horizon ABC Taiwan Electronics is expected to generate 0.71 times more return on investment than Hon Hai. However, ABC Taiwan Electronics is 1.41 times less risky than Hon Hai. It trades about 0.17 of its potential returns per unit of risk. Hon Hai Precision is currently generating about 0.05 per unit of risk. If you would invest  1,990  in ABC Taiwan Electronics on September 3, 2024 and sell it today you would earn a total of  305.00  from holding ABC Taiwan Electronics or generate 15.33% return on investment over 90 days.

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

ABC Taiwan Electronics  vs.  Hon Hai Precision

ABC Taiwan Electronics

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ABC Taiwan Electronics are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, ABC Taiwan showed solid returns over the last few months and may actually be approaching a breakup point.

Hon Hai Precision

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Hon Hai Precision are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Hon Hai may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with ABC Taiwan and Hon Hai

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

The idea behind ABC Taiwan Electronics and Hon Hai Precision 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.