Correlation Between Bank of America and STMicroelectronics

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

By analyzing existing cross correlation between Bank of America and STMicroelectronics NV, you can compare the effects of market volatilities on Bank of America and STMicroelectronics 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 STMicroelectronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and STMicroelectronics.

Diversification Opportunities for Bank of America and STMicroelectronics

-0.8

Correlation Coefficient

Bank of America  STMicroelectronics

Pay attention - limited upside

The 3 months correlation between Bank and STMicroelectronics is -0.8. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and STMicroelectronics NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics 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 Bank of America are associated (or correlated) with STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics has no effect on the direction of Bank of America i.e., Bank of America and STMicroelectronics go up and down completely randomly.

Pair Corralation between Bank of America and STMicroelectronics

Considering the 90-day investment horizon Bank of America is expected to generate 0.51 times more return on investment than STMicroelectronics. However, Bank of America is 1.95 times less risky than STMicroelectronics. It trades about 0.05 of its potential returns per unit of risk. STMicroelectronics NV is currently generating about -0.01 per unit of risk. If you would invest  3,169  in Bank of America on September 23, 2024 and sell it today you would earn a total of  1,248  from holding Bank of America or generate 39.38% return on investment over 90 days.

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

Bank of America  vs.  STMicroelectronics NV

Bank of America

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Bank of America may actually be approaching a critical reversion point that can send shares even higher in January 2025.

STMicroelectronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Bank of America and STMicroelectronics

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

The idea behind Bank of America and STMicroelectronics NV 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..