Correlation Between Chung Hwa and ABC Taiwan

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

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

Diversification Opportunities for Chung Hwa and ABC Taiwan

-0.09

Correlation Coefficient

Chung Hwa  ABC Taiwan

Good diversification

The 3 months correlation between Chung and ABC is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Chung Hwa Food and ABC Taiwan Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABC Taiwan Electronics and Chung Hwa 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 Chung Hwa Food are associated (or correlated) with ABC Taiwan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABC Taiwan Electronics has no effect on the direction of Chung Hwa i.e., Chung Hwa and ABC Taiwan go up and down completely randomly.

Pair Corralation between Chung Hwa and ABC Taiwan

Assuming the 90 days trading horizon Chung Hwa Food is expected to under-perform the ABC Taiwan. But the stock apears to be less risky and, when comparing its historical volatility, Chung Hwa Food is 4.6 times less risky than ABC Taiwan. The stock trades about -0.12 of its potential returns per unit of risk. The ABC Taiwan Electronics is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  2,110  in ABC Taiwan Electronics on October 1, 2024 and sell it today you would lose (60.00) from holding ABC Taiwan Electronics or give up 2.84% of portfolio value over 90 days.

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

Chung Hwa Food  vs.  ABC Taiwan Electronics

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.

ABC Taiwan Electronics

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Chung Hwa Food and ABC Taiwan Electronics 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.