Correlation Between NVIDIA and Broadcom

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

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

Diversification Opportunities for NVIDIA and Broadcom

0.79

Correlation Coefficient

NVIDIA  Broadcom

Poor diversification

The 3 months correlation between NVIDIA and Broadcom is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding NVIDIA and Broadcom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broadcom and NVIDIA 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 NVIDIA are associated (or correlated) with Broadcom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Broadcom has no effect on the direction of NVIDIA i.e., NVIDIA and Broadcom go up and down completely randomly.

Pair Corralation between NVIDIA and Broadcom

Assuming the 90 days trading horizon NVIDIA is expected to generate 1.09 times more return on investment than Broadcom. However, NVIDIA is 1.09 times more volatile than Broadcom. It trades about 0.11 of its potential returns per unit of risk. Broadcom is currently generating about 0.04 per unit of risk. If you would invest  1,403  in NVIDIA on August 30, 2024 and sell it today you would earn a total of  275.00  from holding NVIDIA or generate 19.6% return on investment over 90 days.

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

NVIDIA  vs.  Broadcom

NVIDIA

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NVIDIA are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, NVIDIA sustained solid returns over the last few months and may actually be approaching a breakup point.

Broadcom

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Broadcom may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with NVIDIA and Broadcom

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

The idea behind NVIDIA and Broadcom 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.