Correlation Between Amazon and Applied Materials

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

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

Diversification Opportunities for Amazon and Applied Materials

-0.67

Correlation Coefficient

Amazon  Applied Materials

Excellent diversification

The 3 months correlation between Amazon and Applied is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Amazon 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 Amazon Inc are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Amazon i.e., Amazon and Applied Materials go up and down completely randomly.

Pair Corralation between Amazon and Applied Materials

Assuming the 90 days trading horizon Amazon Inc is expected to generate 0.72 times more return on investment than Applied Materials. However, Amazon Inc is 1.39 times less risky than Applied Materials. It trades about 0.13 of its potential returns per unit of risk. Applied Materials is currently generating about -0.06 per unit of risk. If you would invest  337,694  in Amazon Inc on September 23, 2024 and sell it today you would earn a total of  111,837  from holding Amazon Inc or generate 33.12% return on investment over 90 days.

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

Amazon Inc  vs.  Applied Materials

Amazon Inc

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Amazon showed solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Amazon and Applied Materials

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

The idea behind Amazon Inc and Applied Materials 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.