Correlation Between Sims Metal and Telkom Indonesia

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

By analyzing existing cross correlation between Sims Metal Management and Telkom Indonesia Tbk, you can compare the effects of market volatilities on Sims Metal and Telkom Indonesia 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 Sims Metal with a short position of Telkom Indonesia. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sims Metal and Telkom Indonesia.

Diversification Opportunities for Sims Metal and Telkom Indonesia

0.26

Correlation Coefficient

Sims Metal  Telkom Indonesia

Modest diversification

The 3 months correlation between Sims and Telkom is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Sims Metal Management and Telkom Indonesia Tbk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telkom Indonesia Tbk and Sims Metal 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 Sims Metal Management are associated (or correlated) with Telkom Indonesia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telkom Indonesia Tbk has no effect on the direction of Sims Metal i.e., Sims Metal and Telkom Indonesia go up and down completely randomly.

Pair Corralation between Sims Metal and Telkom Indonesia

Assuming the 90 days horizon Sims Metal is expected to generate 8.48 times less return on investment than Telkom Indonesia. But when comparing it to its historical volatility, Sims Metal Management is 3.55 times less risky than Telkom Indonesia. It trades about 0.01 of its potential returns per unit of risk. Telkom Indonesia Tbk is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  16.00  in Telkom Indonesia Tbk on October 24, 2024 and sell it today you would lose (1.00) from holding Telkom Indonesia Tbk or give up 6.25% of portfolio value over 90 days.

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

Sims Metal Management  vs.  Telkom Indonesia Tbk

Sims Metal Management

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sims Metal Management has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Sims Metal is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Telkom Indonesia Tbk

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Telkom Indonesia Tbk are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile forward indicators, Telkom Indonesia reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sims Metal and Telkom Indonesia

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

The idea behind Sims Metal Management and Telkom Indonesia Tbk 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.