Correlation Between Bank of America and Silicon Motion

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

By analyzing existing cross correlation between Verizon Communications and Silicon Motion Technology, you can compare the effects of market volatilities on Bank of America and Silicon Motion 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 Bank of America with a short position of Silicon Motion. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and Silicon Motion.

Diversification Opportunities for Bank of America and Silicon Motion

0.25

Correlation Coefficient

Bank of America  Silicon Motion

Modest diversification

The 3 months correlation between Bank and Silicon is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and Silicon Motion Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Silicon Motion Technology and Bank of America 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 Verizon Communications are associated (or correlated) with Silicon Motion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Silicon Motion Technology has no effect on the direction of Bank of America i.e., Bank of America and Silicon Motion go up and down completely randomly.

Pair Corralation between Bank of America and Silicon Motion

Assuming the 90 days trading horizon Verizon Communications is expected to generate 0.65 times more return on investment than Silicon Motion. However, Verizon Communications is 1.55 times less risky than Silicon Motion. It trades about 0.08 of its potential returns per unit of risk. Silicon Motion Technology is currently generating about 0.03 per unit of risk. If you would invest  2,760  in Verizon Communications on September 12, 2024 and sell it today you would earn a total of  1,256  from holding Verizon Communications or generate 45.51% return on investment over 90 days.

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

Verizon Communications  vs.  Silicon Motion Technology

Verizon Communications

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable fundamental indicators, Bank of America is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Silicon Motion Technology

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Silicon Motion Technology are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Silicon Motion may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Bank of America and Silicon Motion

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

The idea behind Verizon Communications and Silicon Motion Technology 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.