Correlation Between Arrow Electronics and Applied Materials

Can any of the company-specific risk be diversified away by investing in both Arrow Electronics and Applied Materials 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 Arrow Electronics and Applied Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Arrow Electronics and Applied Materials

0.4

Correlation Coefficient

Arrow Electronics  Applied Materials

Very weak diversification

The 3 months correlation between Arrow and Applied is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Arrow Electronics and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Arrow Electronics 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 Arrow Electronics are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Arrow Electronics i.e., Arrow Electronics and Applied Materials go up and down completely randomly.

Pair Corralation between Arrow Electronics and Applied Materials

Assuming the 90 days trading horizon Arrow Electronics is expected to generate 5.02 times less return on investment than Applied Materials. But when comparing it to its historical volatility, Arrow Electronics is 1.7 times less risky than Applied Materials. It trades about 0.12 of its potential returns per unit of risk. Applied Materials is currently generating about 0.37 of returns per unit of risk over similar time horizon. If you would invest  16,817  in Applied Materials on October 25, 2024 and sell it today you would earn a total of  2,971  from holding Applied Materials or generate 17.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.0%
Values	Daily Returns

Arrow Electronics  vs.  Applied Materials

Arrow Electronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Arrow Electronics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Applied Materials

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Applied Materials are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Applied Materials may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Arrow Electronics and Applied Materials

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

The idea behind Arrow Electronics and Applied Materials 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.