Correlation Between ISEQ 20 and Taiwan Weighted

Can any of the company-specific risk be diversified away by investing in both ISEQ 20 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 ISEQ 20 and Taiwan Weighted into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ISEQ 20 Price and Taiwan Weighted, you can compare the effects of market volatilities on ISEQ 20 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 ISEQ 20 with a short position of Taiwan Weighted. Check out your portfolio center. Please also check ongoing floating volatility patterns of ISEQ 20 and Taiwan Weighted.

Diversification Opportunities for ISEQ 20 and Taiwan Weighted

0.38

Correlation Coefficient

ISEQ 20  Taiwan Weighted

Weak diversification

The 3 months correlation between ISEQ and Taiwan is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding ISEQ 20 Price and Taiwan Weighted in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Weighted and ISEQ 20 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 ISEQ 20 Price 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 ISEQ 20 i.e., ISEQ 20 and Taiwan Weighted go up and down completely randomly.

Pair Corralation between ISEQ 20 and Taiwan Weighted

Assuming the 90 days trading horizon ISEQ 20 is expected to generate 1.69 times less return on investment than Taiwan Weighted. But when comparing it to its historical volatility, ISEQ 20 Price is 1.97 times less risky than Taiwan Weighted. It trades about 0.04 of its potential returns per unit of risk. Taiwan Weighted is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,022,233  in Taiwan Weighted on February 1, 2024 and sell it today you would earn a total of  17,427  from holding Taiwan Weighted or generate 0.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

ISEQ 20 Price  vs.  Taiwan Weighted

Pair Trading with ISEQ 20 and Taiwan Weighted

The main advantage of trading using opposite ISEQ 20 and Taiwan Weighted positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ISEQ 20 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 ISEQ 20 Price 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.