Correlation Between Applied Materials and Xiaomi

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

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

Diversification Opportunities for Applied Materials and Xiaomi

-0.63

Correlation Coefficient

Applied Materials  Xiaomi

Excellent diversification

The 3 months correlation between Applied and Xiaomi is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Xiaomi in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xiaomi and Applied Materials 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 Applied Materials are associated (or correlated) with Xiaomi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xiaomi has no effect on the direction of Applied Materials i.e., Applied Materials and Xiaomi go up and down completely randomly.

Pair Corralation between Applied Materials and Xiaomi

Assuming the 90 days trading horizon Applied Materials is expected to generate 49.77 times less return on investment than Xiaomi. But when comparing it to its historical volatility, Applied Materials is 2.8 times less risky than Xiaomi. It trades about 0.02 of its potential returns per unit of risk. Xiaomi is currently generating about 0.34 of returns per unit of risk over similar time horizon. If you would invest  8,200  in Xiaomi on October 8, 2024 and sell it today you would earn a total of  2,073  from holding Xiaomi or generate 25.28% return on investment over 90 days.

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

Applied Materials  vs.  Xiaomi

Applied Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Xiaomi

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Xiaomi are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, Xiaomi displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Applied Materials and Xiaomi

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

The idea behind Applied Materials and Xiaomi 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.