Correlation Between ABC Taiwan and Lien Chang

Can any of the company-specific risk be diversified away by investing in both ABC Taiwan and Lien Chang 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 Lien Chang 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 Lien Chang Electronic, you can compare the effects of market volatilities on ABC Taiwan and Lien Chang 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 Lien Chang. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABC Taiwan and Lien Chang.

Diversification Opportunities for ABC Taiwan and Lien Chang

0.83

Correlation Coefficient

ABC Taiwan  Lien Chang

Very poor diversification

The 3 months correlation between ABC and Lien is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding ABC Taiwan Electronics and Lien Chang Electronic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lien Chang Electronic 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 Lien Chang. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lien Chang Electronic has no effect on the direction of ABC Taiwan i.e., ABC Taiwan and Lien Chang go up and down completely randomly.

Pair Corralation between ABC Taiwan and Lien Chang

Assuming the 90 days trading horizon ABC Taiwan Electronics is expected to generate 0.27 times more return on investment than Lien Chang. However, ABC Taiwan Electronics is 3.71 times less risky than Lien Chang. It trades about 0.14 of its potential returns per unit of risk. Lien Chang Electronic is currently generating about -0.08 per unit of risk. If you would invest  2,185  in ABC Taiwan Electronics on August 31, 2024 and sell it today you would earn a total of  80.00  from holding ABC Taiwan Electronics or generate 3.66% return on investment over 90 days.

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

ABC Taiwan Electronics  vs.  Lien Chang Electronic

ABC Taiwan Electronics

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ABC Taiwan Electronics are ranked lower than 11 (%) 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.

Lien Chang Electronic

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lien Chang Electronic are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Lien Chang showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with ABC Taiwan and Lien Chang

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

The idea behind ABC Taiwan Electronics and Lien Chang Electronic 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.