Correlation Between Hon Hai and UMC Electronics

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

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

Diversification Opportunities for Hon Hai and UMC Electronics

-0.4

Correlation Coefficient

Hon Hai  UMC Electronics

Very good diversification

The 3 months correlation between Hon and UMC is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Hon Hai Precision and UMC Electronics Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UMC Electronics and Hon Hai 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 Hon Hai Precision are associated (or correlated) with UMC Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UMC Electronics has no effect on the direction of Hon Hai i.e., Hon Hai and UMC Electronics go up and down completely randomly.

Pair Corralation between Hon Hai and UMC Electronics

Assuming the 90 days trading horizon Hon Hai Precision is expected to generate 0.93 times more return on investment than UMC Electronics. However, Hon Hai Precision is 1.08 times less risky than UMC Electronics. It trades about 0.08 of its potential returns per unit of risk. UMC Electronics Co is currently generating about -0.11 per unit of risk. If you would invest  960.00  in Hon Hai Precision on September 13, 2024 and sell it today you would earn a total of  130.00  from holding Hon Hai Precision or generate 13.54% return on investment over 90 days.

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

Hon Hai Precision  vs.  UMC Electronics Co

Hon Hai Precision

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Hon Hai Precision are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Hon Hai reported solid returns over the last few months and may actually be approaching a breakup point.

UMC Electronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days UMC Electronics Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Hon Hai and UMC Electronics

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

The idea behind Hon Hai Precision and UMC Electronics Co 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.