Correlation Between Arm Holdings and NeoMagic

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

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

Diversification Opportunities for Arm Holdings and NeoMagic

0.65

Correlation Coefficient

Arm Holdings  NeoMagic

Poor diversification

The 3 months correlation between Arm and NeoMagic is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Arm Holdings plc and NeoMagic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NeoMagic and Arm Holdings 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 Arm Holdings plc are associated (or correlated) with NeoMagic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NeoMagic has no effect on the direction of Arm Holdings i.e., Arm Holdings and NeoMagic go up and down completely randomly.

Pair Corralation between Arm Holdings and NeoMagic

Considering the 90-day investment horizon Arm Holdings is expected to generate 1.54 times less return on investment than NeoMagic. But when comparing it to its historical volatility, Arm Holdings plc is 2.08 times less risky than NeoMagic. It trades about 0.07 of its potential returns per unit of risk. NeoMagic is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  0.73  in NeoMagic on October 5, 2024 and sell it today you would lose (0.01) from holding NeoMagic or give up 1.37% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	27.36%
Values	Daily Returns

Arm Holdings plc  vs.  NeoMagic

Arm Holdings plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Arm Holdings plc 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 healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

NeoMagic

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NeoMagic has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, NeoMagic is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Arm Holdings and NeoMagic

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

The idea behind Arm Holdings plc and NeoMagic 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.