Correlation Between STMicroelectronics and United Utilities

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

By analyzing existing cross correlation between STMicroelectronics NV and United Utilities Group, you can compare the effects of market volatilities on STMicroelectronics and United Utilities 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 STMicroelectronics with a short position of United Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of STMicroelectronics and United Utilities.

Diversification Opportunities for STMicroelectronics and United Utilities

-0.11

Correlation Coefficient

STMicroelectronics  United Utilities

Good diversification

The 3 months correlation between STMicroelectronics and United is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and United Utilities Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Utilities and STMicroelectronics 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 STMicroelectronics NV are associated (or correlated) with United Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Utilities has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and United Utilities go up and down completely randomly.

Pair Corralation between STMicroelectronics and United Utilities

Assuming the 90 days trading horizon STMicroelectronics NV is expected to under-perform the United Utilities. In addition to that, STMicroelectronics is 2.18 times more volatile than United Utilities Group. It trades about -0.04 of its total potential returns per unit of risk. United Utilities Group is currently generating about -0.07 per unit of volatility. If you would invest  104,550  in United Utilities Group on December 28, 2024 and sell it today you would lose (6,850) from holding United Utilities Group or give up 6.55% of portfolio value over 90 days.

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

STMicroelectronics NV  vs.  United Utilities Group

STMicroelectronics

Risk-Adjusted Performance

Very Weak

Over the last 90 days STMicroelectronics NV 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.

United Utilities

Risk-Adjusted Performance

Very Weak

Over the last 90 days United Utilities Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, United Utilities is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with STMicroelectronics and United Utilities

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

The idea behind STMicroelectronics NV and United Utilities Group 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.