Correlation Between Taiwan Weighted and Ambassador Hotel

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

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

Diversification Opportunities for Taiwan Weighted and Ambassador Hotel

0.08

Correlation Coefficient

Taiwan Weighted  Ambassador Hotel

Significant diversification

The 3 months correlation between Taiwan and Ambassador is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and Ambassador Hotel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ambassador Hotel and Taiwan Weighted 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 Weighted are associated (or correlated) with Ambassador Hotel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ambassador Hotel has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and Ambassador Hotel go up and down completely randomly.

Pair Corralation between Taiwan Weighted and Ambassador Hotel

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 0.66 times more return on investment than Ambassador Hotel. However, Taiwan Weighted is 1.51 times less risky than Ambassador Hotel. It trades about 0.01 of its potential returns per unit of risk. Ambassador Hotel is currently generating about -0.05 per unit of risk. If you would invest  2,223,510  in Taiwan Weighted on August 31, 2024 and sell it today you would earn a total of  2,740  from holding Taiwan Weighted or generate 0.12% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

Taiwan Weighted  vs.  Ambassador Hotel

Pair Trading with Taiwan Weighted and Ambassador Hotel

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

The idea behind Taiwan Weighted and Ambassador Hotel 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.