Correlation Between Diversified Energy and STMicroelectronics

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

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

Diversification Opportunities for Diversified Energy and STMicroelectronics

-0.54

Correlation Coefficient

Diversified Energy  STMicroelectronics

Excellent diversification

The 3 months correlation between Diversified and STMicroelectronics is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Energy and STMicroelectronics NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics and Diversified Energy 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 Diversified Energy 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 Diversified Energy i.e., Diversified Energy and STMicroelectronics go up and down completely randomly.

Pair Corralation between Diversified Energy and STMicroelectronics

Assuming the 90 days trading horizon Diversified Energy is expected to under-perform the STMicroelectronics. But the stock apears to be less risky and, when comparing its historical volatility, Diversified Energy is 1.05 times less risky than STMicroelectronics. The stock trades about -0.06 of its potential returns per unit of risk. The STMicroelectronics NV is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,377  in STMicroelectronics NV on November 28, 2024 and sell it today you would earn a total of  201.00  from holding STMicroelectronics NV or generate 8.46% return on investment over 90 days.

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

Diversified Energy  vs.  STMicroelectronics NV

Diversified Energy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Diversified Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

STMicroelectronics

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in STMicroelectronics NV are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, STMicroelectronics may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Diversified Energy and STMicroelectronics

The main advantage of trading using opposite Diversified Energy and STMicroelectronics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diversified Energy 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 Diversified Energy 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.