Correlation Between Compass Diversified and STMicroelectronics

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

By analyzing existing cross correlation between Compass Diversified Holdings and STMicroelectronics NV ADR, you can compare the effects of market volatilities on Compass Diversified 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 Compass Diversified with a short position of STMicroelectronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Compass Diversified and STMicroelectronics.

Diversification Opportunities for Compass Diversified and STMicroelectronics

-0.13

Correlation Coefficient

Compass Diversified  STMicroelectronics

Good diversification

The 3 months correlation between Compass and STMicroelectronics is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Compass Diversified Holdings and STMicroelectronics NV ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics NV ADR and Compass Diversified 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 Compass Diversified Holdings 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 NV ADR has no effect on the direction of Compass Diversified i.e., Compass Diversified and STMicroelectronics go up and down completely randomly.

Pair Corralation between Compass Diversified and STMicroelectronics

Assuming the 90 days trading horizon Compass Diversified Holdings is expected to generate 0.35 times more return on investment than STMicroelectronics. However, Compass Diversified Holdings is 2.89 times less risky than STMicroelectronics. It trades about -0.03 of its potential returns per unit of risk. STMicroelectronics NV ADR is currently generating about -0.04 per unit of risk. If you would invest  2,268  in Compass Diversified Holdings on December 26, 2024 and sell it today you would lose (53.00) from holding Compass Diversified Holdings or give up 2.34% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Compass Diversified Holdings  vs.  STMicroelectronics NV ADR

Compass Diversified

Risk-Adjusted Performance

Very Weak

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

STMicroelectronics NV ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days STMicroelectronics NV ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Compass Diversified and STMicroelectronics

The main advantage of trading using opposite Compass Diversified and STMicroelectronics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Compass Diversified 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 Compass Diversified Holdings and STMicroelectronics NV ADR 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.