Correlation Between Mercuries Life and Taiwan Weighted

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

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

Diversification Opportunities for Mercuries Life and Taiwan Weighted

0.8

Correlation Coefficient

Mercuries Life  Taiwan Weighted

Very poor diversification

The 3 months correlation between Mercuries and Taiwan is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Mercuries Life Insurance and Taiwan Weighted in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Weighted and Mercuries Life 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 Mercuries Life Insurance are associated (or correlated) with Taiwan Weighted. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Weighted has no effect on the direction of Mercuries Life i.e., Mercuries Life and Taiwan Weighted go up and down completely randomly.

Pair Corralation between Mercuries Life and Taiwan Weighted

Assuming the 90 days trading horizon Mercuries Life Insurance is expected to generate 2.76 times more return on investment than Taiwan Weighted. However, Mercuries Life is 2.76 times more volatile than Taiwan Weighted. It trades about 0.26 of its potential returns per unit of risk. Taiwan Weighted is currently generating about 0.14 per unit of risk. If you would invest  493.00  in Mercuries Life Insurance on March 14, 2024 and sell it today you would earn a total of  289.00  from holding Mercuries Life Insurance or generate 58.62% return on investment over 90 days.

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

Mercuries Life Insurance  vs.  Taiwan Weighted

Pair Trading with Mercuries Life and Taiwan Weighted

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

The idea behind Mercuries Life Insurance and Taiwan Weighted 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.