Correlation Between Berkshire Hathaway and Applied Materials

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

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

Diversification Opportunities for Berkshire Hathaway and Applied Materials

-0.47

Correlation Coefficient

Berkshire Hathaway  Applied Materials

Very good diversification

The 3 months correlation between Berkshire and Applied is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding Berkshire Hathaway and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Berkshire Hathaway 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 Berkshire Hathaway are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Berkshire Hathaway i.e., Berkshire Hathaway and Applied Materials go up and down completely randomly.

Pair Corralation between Berkshire Hathaway and Applied Materials

Assuming the 90 days trading horizon Berkshire Hathaway is expected to generate 0.55 times more return on investment than Applied Materials. However, Berkshire Hathaway is 1.8 times less risky than Applied Materials. It trades about 0.08 of its potential returns per unit of risk. Applied Materials is currently generating about -0.04 per unit of risk. If you would invest  929,002  in Berkshire Hathaway on August 30, 2024 and sell it today you would earn a total of  67,798  from holding Berkshire Hathaway or generate 7.3% return on investment over 90 days.

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

Berkshire Hathaway  vs.  Applied Materials

Berkshire Hathaway

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Berkshire Hathaway are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Berkshire Hathaway may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Applied Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Applied Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Berkshire Hathaway and Applied Materials

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

The idea behind Berkshire Hathaway and Applied Materials 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.