Correlation Between Broadcom and MP Materials

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

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

Diversification Opportunities for Broadcom and MP Materials

0.05

Correlation Coefficient

Broadcom  MP Materials

Significant diversification

The 3 months correlation between Broadcom and M2PM34 is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and MP Materials Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MP Materials Corp 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 MP Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MP Materials Corp has no effect on the direction of Broadcom i.e., Broadcom and MP Materials go up and down completely randomly.

Pair Corralation between Broadcom and MP Materials

Assuming the 90 days trading horizon Broadcom is expected to generate 12.28 times less return on investment than MP Materials. But when comparing it to its historical volatility, Broadcom is 2.75 times less risky than MP Materials. It trades about 0.06 of its potential returns per unit of risk. MP Materials Corp is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  1,978  in MP Materials Corp on October 23, 2024 and sell it today you would earn a total of  576.00  from holding MP Materials Corp or generate 29.12% return on investment over 90 days.

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

Broadcom  vs.  MP Materials Corp

Broadcom

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 12 (%) 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.

MP Materials Corp

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MP Materials Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, MP Materials sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Broadcom and MP Materials

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

The idea behind Broadcom and MP Materials Corp 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.