Correlation Between Applied Materials and Schlumberger

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

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

Diversification Opportunities for Applied Materials and Schlumberger

0.5

Correlation Coefficient

Applied Materials  Schlumberger

Very weak diversification

The 3 months correlation between Applied and Schlumberger is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Schlumberger Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schlumberger Limited 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 Schlumberger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schlumberger Limited has no effect on the direction of Applied Materials i.e., Applied Materials and Schlumberger go up and down completely randomly.

Pair Corralation between Applied Materials and Schlumberger

Assuming the 90 days trading horizon Applied Materials is expected to generate 1.0 times more return on investment than Schlumberger. However, Applied Materials is 1.0 times more volatile than Schlumberger Limited. It trades about 0.15 of its potential returns per unit of risk. Schlumberger Limited is currently generating about -0.14 per unit of risk. If you would invest  347,400  in Applied Materials on October 10, 2024 and sell it today you would earn a total of  16,500  from holding Applied Materials or generate 4.75% 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.  Schlumberger Limited

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.

Schlumberger Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schlumberger Limited 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.

Pair Trading with Applied Materials and Schlumberger

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

The idea behind Applied Materials and Schlumberger Limited 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..