Correlation Between Applied Materials and NVIDIA

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

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

Diversification Opportunities for Applied Materials and NVIDIA

0.46

Correlation Coefficient

Applied Materials  NVIDIA

Very weak diversification

The 3 months correlation between Applied and NVIDIA is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and NVIDIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NVIDIA 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 NVIDIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NVIDIA has no effect on the direction of Applied Materials i.e., Applied Materials and NVIDIA go up and down completely randomly.

Pair Corralation between Applied Materials and NVIDIA

Assuming the 90 days trading horizon Applied Materials is expected to generate 0.94 times more return on investment than NVIDIA. However, Applied Materials is 1.06 times less risky than NVIDIA. It trades about 0.29 of its potential returns per unit of risk. NVIDIA is currently generating about 0.12 per unit of risk. If you would invest  340,400  in Applied Materials on October 26, 2024 and sell it today you would earn a total of  47,100  from holding Applied Materials or generate 13.84% return on investment over 90 days.

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

Applied Materials  vs.  NVIDIA

Applied Materials

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Applied Materials are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

NVIDIA

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in NVIDIA are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, NVIDIA may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Applied Materials and NVIDIA

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

The idea behind Applied Materials and NVIDIA 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.