Correlation Between Monolithic Power and Silicon Motion

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

By analyzing existing cross correlation between Monolithic Power Systems and Silicon Motion Technology, you can compare the effects of market volatilities on Monolithic Power and Silicon Motion 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 Monolithic Power with a short position of Silicon Motion. Check out your portfolio center. Please also check ongoing floating volatility patterns of Monolithic Power and Silicon Motion.

Diversification Opportunities for Monolithic Power and Silicon Motion

0.4

Correlation Coefficient

Monolithic Power  Silicon Motion

Very weak diversification

The 3 months correlation between Monolithic and Silicon is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Monolithic Power Systems and Silicon Motion Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Silicon Motion Technology and Monolithic Power 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 Monolithic Power Systems are associated (or correlated) with Silicon Motion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Silicon Motion Technology has no effect on the direction of Monolithic Power i.e., Monolithic Power and Silicon Motion go up and down completely randomly.

Pair Corralation between Monolithic Power and Silicon Motion

Given the investment horizon of 90 days Monolithic Power Systems is expected to generate 1.42 times more return on investment than Silicon Motion. However, Monolithic Power is 1.42 times more volatile than Silicon Motion Technology. It trades about 0.02 of its potential returns per unit of risk. Silicon Motion Technology is currently generating about -0.03 per unit of risk. If you would invest  60,240  in Monolithic Power Systems on December 29, 2024 and sell it today you would lose (96.00) from holding Monolithic Power Systems or give up 0.16% of portfolio value over 90 days.

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

Monolithic Power Systems  vs.  Silicon Motion Technology

Monolithic Power Systems

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Monolithic Power Systems are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Monolithic Power is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Silicon Motion Technology

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Monolithic Power and Silicon Motion

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

The idea behind Monolithic Power Systems and Silicon Motion Technology 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.