Correlation Between Microchip Technology and NXP Semiconductors

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

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

Diversification Opportunities for Microchip Technology and NXP Semiconductors

0.61

Correlation Coefficient

Microchip Technology  NXP Semiconductors

Poor diversification

The 3 months correlation between Microchip and NXP is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Microchip Technology Incorpora and NXP Semiconductors NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXP Semiconductors and Microchip Technology 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 Microchip Technology Incorporated are associated (or correlated) with NXP Semiconductors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXP Semiconductors has no effect on the direction of Microchip Technology i.e., Microchip Technology and NXP Semiconductors go up and down completely randomly.

Pair Corralation between Microchip Technology and NXP Semiconductors

Assuming the 90 days trading horizon Microchip Technology Incorporated is expected to under-perform the NXP Semiconductors. In addition to that, Microchip Technology is 1.04 times more volatile than NXP Semiconductors NV. It trades about -0.05 of its total potential returns per unit of risk. NXP Semiconductors NV is currently generating about -0.05 per unit of volatility. If you would invest  66,271  in NXP Semiconductors NV on December 25, 2024 and sell it today you would lose (5,818) from holding NXP Semiconductors NV or give up 8.78% of portfolio value over 90 days.

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

Microchip Technology Incorpora  vs.  NXP Semiconductors NV

Microchip Technology

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microchip Technology Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

NXP Semiconductors

Risk-Adjusted Performance

Very Weak

Over the last 90 days NXP Semiconductors NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Microchip Technology and NXP Semiconductors

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

The idea behind Microchip Technology Incorporated and NXP Semiconductors 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.