Correlation Between Nippon Steel and POSCO Holdings

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

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

Diversification Opportunities for Nippon Steel and POSCO Holdings

0.32

Correlation Coefficient

Nippon Steel  POSCO Holdings

Weak diversification

The 3 months correlation between Nippon and POSCO is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Nippon Steel and POSCO Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on POSCO Holdings and Nippon Steel 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 Nippon Steel are associated (or correlated) with POSCO Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of POSCO Holdings has no effect on the direction of Nippon Steel i.e., Nippon Steel and POSCO Holdings go up and down completely randomly.

Pair Corralation between Nippon Steel and POSCO Holdings

Assuming the 90 days horizon Nippon Steel is expected to generate 2.08 times less return on investment than POSCO Holdings. But when comparing it to its historical volatility, Nippon Steel is 1.29 times less risky than POSCO Holdings. It trades about 0.05 of its potential returns per unit of risk. POSCO Holdings is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  4,100  in POSCO Holdings on December 29, 2024 and sell it today you would earn a total of  560.00  from holding POSCO Holdings or generate 13.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Nippon Steel  vs.  POSCO Holdings

Nippon Steel

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Nippon Steel are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Nippon Steel may actually be approaching a critical reversion point that can send shares even higher in April 2025.

POSCO Holdings

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in POSCO Holdings are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, POSCO Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Nippon Steel and POSCO Holdings

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

The idea behind Nippon Steel and POSCO Holdings 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.