Correlation Between Methode Electronics and Tower Semiconductor

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

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

Diversification Opportunities for Methode Electronics and Tower Semiconductor

0.57

Correlation Coefficient

Methode Electronics  Tower Semiconductor

Very weak diversification

The 3 months correlation between Methode and Tower is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Methode Electronics and Tower Semiconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tower Semiconductor and Methode Electronics 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 Methode Electronics are associated (or correlated) with Tower Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tower Semiconductor has no effect on the direction of Methode Electronics i.e., Methode Electronics and Tower Semiconductor go up and down completely randomly.

Pair Corralation between Methode Electronics and Tower Semiconductor

Assuming the 90 days trading horizon Methode Electronics is expected to under-perform the Tower Semiconductor. In addition to that, Methode Electronics is 1.64 times more volatile than Tower Semiconductor. It trades about -0.04 of its total potential returns per unit of risk. Tower Semiconductor is currently generating about 0.02 per unit of volatility. If you would invest  3,805  in Tower Semiconductor on December 2, 2024 and sell it today you would earn a total of  203.00  from holding Tower Semiconductor or generate 5.34% return on investment over 90 days.

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

Methode Electronics  vs.  Tower Semiconductor

Methode Electronics

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Methode Electronics are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Methode Electronics is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Tower Semiconductor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tower Semiconductor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Methode Electronics and Tower Semiconductor

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

The idea behind Methode Electronics and Tower Semiconductor 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.