Correlation Between KLA Tencor and Arm Holdings

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

By analyzing existing cross correlation between KLA Tencor and Arm Holdings plc, you can compare the effects of market volatilities on KLA Tencor and Arm Holdings 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 KLA Tencor with a short position of Arm Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of KLA Tencor and Arm Holdings.

Diversification Opportunities for KLA Tencor and Arm Holdings

0.62

Correlation Coefficient

KLA Tencor  Arm Holdings

Poor diversification

The 3 months correlation between KLA and Arm is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding KLA Tencor and Arm Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arm Holdings plc and KLA Tencor 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 KLA Tencor are associated (or correlated) with Arm Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arm Holdings plc has no effect on the direction of KLA Tencor i.e., KLA Tencor and Arm Holdings go up and down completely randomly.

Pair Corralation between KLA Tencor and Arm Holdings

Given the investment horizon of 90 days KLA Tencor is expected to generate 0.5 times more return on investment than Arm Holdings. However, KLA Tencor is 1.98 times less risky than Arm Holdings. It trades about 0.1 of its potential returns per unit of risk. Arm Holdings plc is currently generating about 0.01 per unit of risk. If you would invest  64,709  in KLA Tencor on December 25, 2024 and sell it today you would earn a total of  8,064  from holding KLA Tencor or generate 12.46% return on investment over 90 days.

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

KLA Tencor  vs.  Arm Holdings plc

KLA Tencor

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in KLA Tencor are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, KLA Tencor exhibited solid returns over the last few months and may actually be approaching a breakup point.

Arm Holdings plc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Arm Holdings plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Arm Holdings is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with KLA Tencor and Arm Holdings

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

The idea behind KLA Tencor and Arm Holdings plc 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.