Correlation Between Cheng Mei and Taiwan Semiconductor

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

By analyzing existing cross correlation between Cheng Mei Materials and Taiwan Semiconductor Manufacturing, you can compare the effects of market volatilities on Cheng Mei and Taiwan Semiconductor 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 Cheng Mei with a short position of Taiwan Semiconductor. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cheng Mei and Taiwan Semiconductor.

Diversification Opportunities for Cheng Mei and Taiwan Semiconductor

-0.48

Correlation Coefficient

Cheng Mei  Taiwan Semiconductor

Very good diversification

The 3 months correlation between Cheng and Taiwan is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Cheng Mei Materials and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor and Cheng Mei 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 Cheng Mei Materials are associated (or correlated) with Taiwan Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Semiconductor has no effect on the direction of Cheng Mei i.e., Cheng Mei and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between Cheng Mei and Taiwan Semiconductor

Assuming the 90 days trading horizon Cheng Mei Materials is expected to under-perform the Taiwan Semiconductor. But the stock apears to be less risky and, when comparing its historical volatility, Cheng Mei Materials is 1.34 times less risky than Taiwan Semiconductor. The stock trades about -0.04 of its potential returns per unit of risk. The Taiwan Semiconductor Manufacturing is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  93,583  in Taiwan Semiconductor Manufacturing on September 3, 2024 and sell it today you would earn a total of  6,017  from holding Taiwan Semiconductor Manufacturing or generate 6.43% return on investment over 90 days.

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

Cheng Mei Materials  vs.  Taiwan Semiconductor Manufactu

Cheng Mei Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cheng Mei Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Cheng Mei is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Taiwan Semiconductor

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Taiwan Semiconductor may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Cheng Mei and Taiwan Semiconductor

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

The idea behind Cheng Mei Materials and Taiwan Semiconductor Manufacturing 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.