Correlation Between Applied Materials and Vale SA

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

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

Diversification Opportunities for Applied Materials and Vale SA

-0.34

Correlation Coefficient

Applied Materials  Vale SA

Very good diversification

The 3 months correlation between Applied and Vale is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA 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 Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of Applied Materials i.e., Applied Materials and Vale SA go up and down completely randomly.

Pair Corralation between Applied Materials and Vale SA

Assuming the 90 days trading horizon Applied Materials is expected to under-perform the Vale SA. But the stock apears to be less risky and, when comparing its historical volatility, Applied Materials is 1.26 times less risky than Vale SA. The stock trades about -0.03 of its potential returns per unit of risk. The Vale SA is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  18,200  in Vale SA on December 22, 2024 and sell it today you would earn a total of  2,000  from holding Vale SA or generate 10.99% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Applied Materials  vs.  Vale SA

Applied Materials

Risk-Adjusted Performance

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.

Vale SA

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vale SA are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, Vale SA displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Applied Materials and Vale SA

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

The idea behind Applied Materials and Vale SA 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.