Correlation Between Taiwan Semiconductor and HSBC Holdings

Can any of the company-specific risk be diversified away by investing in both Taiwan Semiconductor and HSBC Holdings 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 HSBC Holdings 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 HSBC Holdings plc, you can compare the effects of market volatilities on Taiwan Semiconductor and HSBC Holdings 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 HSBC Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Taiwan Semiconductor and HSBC Holdings.

Diversification Opportunities for Taiwan Semiconductor and HSBC Holdings

0.53

Correlation Coefficient

Taiwan Semiconductor  HSBC Holdings

Very weak diversification

The 3 months correlation between Taiwan and HSBC is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Semiconductor Manufactu and HSBC Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HSBC Holdings plc 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 HSBC Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HSBC Holdings plc has no effect on the direction of Taiwan Semiconductor i.e., Taiwan Semiconductor and HSBC Holdings go up and down completely randomly.

Pair Corralation between Taiwan Semiconductor and HSBC Holdings

Assuming the 90 days trading horizon Taiwan Semiconductor is expected to generate 1.54 times less return on investment than HSBC Holdings. But when comparing it to its historical volatility, Taiwan Semiconductor Manufacturing is 1.04 times less risky than HSBC Holdings. It trades about 0.09 of its potential returns per unit of risk. HSBC Holdings plc is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  76,171  in HSBC Holdings plc on September 26, 2024 and sell it today you would earn a total of  17,329  from holding HSBC Holdings plc or generate 22.75% return on investment over 90 days.

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

Taiwan Semiconductor Manufactu  vs.  HSBC Holdings plc

Taiwan Semiconductor

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Taiwan Semiconductor showed solid returns over the last few months and may actually be approaching a breakup point.

HSBC Holdings plc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, HSBC Holdings showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Taiwan Semiconductor and HSBC Holdings

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

The idea behind Taiwan Semiconductor Manufacturing and HSBC Holdings plc 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.