Correlation Between Reliance Steel and Steel Dynamics

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

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

Diversification Opportunities for Reliance Steel and Steel Dynamics

0.94

Correlation Coefficient

Reliance Steel  Steel Dynamics

Almost no diversification

The 3 months correlation between Reliance and Steel is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Steel Aluminum and Steel Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Steel Dynamics and Reliance 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 Reliance Steel Aluminum are associated (or correlated) with Steel Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Steel Dynamics has no effect on the direction of Reliance Steel i.e., Reliance Steel and Steel Dynamics go up and down completely randomly.

Pair Corralation between Reliance Steel and Steel Dynamics

Allowing for the 90-day total investment horizon Reliance Steel Aluminum is expected to under-perform the Steel Dynamics. But the stock apears to be less risky and, when comparing its historical volatility, Reliance Steel Aluminum is 1.38 times less risky than Steel Dynamics. The stock trades about -0.09 of its potential returns per unit of risk. The Steel Dynamics is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  14,468  in Steel Dynamics on November 28, 2024 and sell it today you would lose (1,120) from holding Steel Dynamics or give up 7.74% of portfolio value over 90 days.

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

Reliance Steel Aluminum  vs.  Steel Dynamics

Reliance Steel Aluminum

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reliance Steel Aluminum has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Steel Dynamics

Risk-Adjusted Performance

Very Weak

Over the last 90 days Steel Dynamics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's essential indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Reliance Steel and Steel Dynamics

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

The idea behind Reliance Steel Aluminum and Steel Dynamics 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.