Correlation Between NXP Semiconductors and Broadcom

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

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

Diversification Opportunities for NXP Semiconductors and Broadcom

0.32

Correlation Coefficient

NXP Semiconductors  Broadcom

Weak diversification

The 3 months correlation between NXP and Broadcom is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding NXP Semiconductors NV and Broadcom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broadcom and NXP Semiconductors 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 NXP Semiconductors NV 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 NXP Semiconductors i.e., NXP Semiconductors and Broadcom go up and down completely randomly.

Pair Corralation between NXP Semiconductors and Broadcom

Given the investment horizon of 90 days NXP Semiconductors NV is expected to under-perform the Broadcom. But the stock apears to be less risky and, when comparing its historical volatility, NXP Semiconductors NV is 1.1 times less risky than Broadcom. The stock trades about -0.02 of its potential returns per unit of risk. The Broadcom is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  16,714  in Broadcom on September 13, 2024 and sell it today you would earn a total of  1,606  from holding Broadcom or generate 9.61% return on investment over 90 days.

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

NXP Semiconductors NV  vs.  Broadcom

NXP Semiconductors

Risk-Adjusted Performance

0 of 100

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 fairly strong basic indicators, NXP Semiconductors is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Broadcom

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady technical and fundamental indicators, Broadcom may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with NXP Semiconductors and Broadcom

The main advantage of trading using opposite NXP Semiconductors and Broadcom positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NXP Semiconductors 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 NXP Semiconductors NV 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.

Check out your portfolio center.

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 Bonds Directory module to find actively traded corporate debentures issued by US companies.