Correlation Between Applied Materials and NetEase

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

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

Diversification Opportunities for Applied Materials and NetEase

0.19

Correlation Coefficient

Applied Materials  NetEase

Average diversification

The 3 months correlation between Applied and NetEase is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and NetEase in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NetEase 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 NetEase. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NetEase has no effect on the direction of Applied Materials i.e., Applied Materials and NetEase go up and down completely randomly.

Pair Corralation between Applied Materials and NetEase

Assuming the 90 days trading horizon Applied Materials is expected to under-perform the NetEase. In addition to that, Applied Materials is 26.86 times more volatile than NetEase. It trades about -0.14 of its total potential returns per unit of risk. NetEase is currently generating about 0.22 per unit of volatility. If you would invest  160,718  in NetEase on September 15, 2024 and sell it today you would earn a total of  881.00  from holding NetEase or generate 0.55% return on investment over 90 days.

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

Applied Materials  vs.  NetEase

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 fairly strong basic indicators, Applied Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

NetEase

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in NetEase are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, NetEase displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Applied Materials and NetEase

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

The idea behind Applied Materials and NetEase 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.