Correlation Between Taiwan Semiconductor and DAX Index

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

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

Diversification Opportunities for Taiwan Semiconductor and DAX Index

0.81

Correlation Coefficient

Taiwan Semiconductor  DAX Index

Very poor diversification

The 3 months correlation between Taiwan and DAX is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and DAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DAX Index and Taiwan Semiconductor 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 Taiwan Semiconductor Manufacturing are associated (or correlated) with DAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DAX Index has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and DAX Index go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and DAX Index

Assuming the 90 days trading horizon Taiwan Semiconductor Manufacturing is expected to generate 3.17 times more return on investment than DAX Index. However, Taiwan Semiconductor is 3.17 times more volatile than DAX Index. It trades about 0.1 of its potential returns per unit of risk. DAX Index is currently generating about 0.07 per unit of risk. If you would invest  7,506  in Taiwan Semiconductor Manufacturing on August 31, 2024 and sell it today you would earn a total of  9,794  from holding Taiwan Semiconductor Manufacturing or generate 130.48% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  DAX Index

Pair Trading with Taiwan Semiconductor and DAX Index

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

The idea behind Taiwan Semiconductor Manufacturing and DAX Index 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.