Correlation Between Formosa Petrochemical and China General

Can any of the company-specific risk be diversified away by investing in both Formosa Petrochemical and China General 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 Formosa Petrochemical and China General into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Formosa Petrochemical Corp and China General Plastics, you can compare the effects of market volatilities on Formosa Petrochemical and China General 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 Formosa Petrochemical with a short position of China General. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formosa Petrochemical and China General.

Diversification Opportunities for Formosa Petrochemical and China General

0.88

Correlation Coefficient

Formosa Petrochemical  China General

Very poor diversification

The 3 months correlation between Formosa and China is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Formosa Petrochemical Corp and China General Plastics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China General Plastics and Formosa Petrochemical 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 Formosa Petrochemical Corp are associated (or correlated) with China General. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China General Plastics has no effect on the direction of Formosa Petrochemical i.e., Formosa Petrochemical and China General go up and down completely randomly.

Pair Corralation between Formosa Petrochemical and China General

Assuming the 90 days trading horizon Formosa Petrochemical Corp is expected to under-perform the China General. But the stock apears to be less risky and, when comparing its historical volatility, Formosa Petrochemical Corp is 1.11 times less risky than China General. The stock trades about -0.2 of its potential returns per unit of risk. The China General Plastics is currently generating about -0.12 of returns per unit of risk over similar time horizon. If you would invest  1,590  in China General Plastics on September 4, 2024 and sell it today you would lose (250.00) from holding China General Plastics or give up 15.72% of portfolio value over 90 days.

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

Formosa Petrochemical Corp  vs.  China General Plastics

Formosa Petrochemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Petrochemical Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

China General Plastics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China General Plastics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Formosa Petrochemical and China General

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

The idea behind Formosa Petrochemical Corp and China General Plastics 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.