Correlation Between Broadcom and Amazon

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

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

Diversification Opportunities for Broadcom and Amazon

0.71

Correlation Coefficient

Broadcom  Amazon

Poor diversification

The 3 months correlation between Broadcom and Amazon is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and Amazon Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Amazon Inc and Broadcom 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 Broadcom are associated (or correlated) with Amazon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Amazon Inc has no effect on the direction of Broadcom i.e., Broadcom and Amazon go up and down completely randomly.

Pair Corralation between Broadcom and Amazon

Assuming the 90 days trading horizon Broadcom is expected to generate 2.78 times more return on investment than Amazon. However, Broadcom is 2.78 times more volatile than Amazon Inc. It trades about 0.2 of its potential returns per unit of risk. Amazon Inc is currently generating about 0.26 per unit of risk. If you would invest  1,427  in Broadcom on October 6, 2024 and sell it today you would earn a total of  637.00  from holding Broadcom or generate 44.64% return on investment over 90 days.

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

Broadcom  vs.  Amazon Inc

Broadcom

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Broadcom sustained solid returns over the last few months and may actually be approaching a breakup point.

Amazon Inc

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Amazon sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Broadcom and Amazon

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

The idea behind Broadcom and Amazon Inc 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.