Correlation Between Reliance Steel and General Dynamics

Can any of the company-specific risk be diversified away by investing in both Reliance Steel and General 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 General 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 General Dynamics, you can compare the effects of market volatilities on Reliance Steel and General 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 General Dynamics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Reliance Steel and General Dynamics.

Diversification Opportunities for Reliance Steel and General Dynamics

0.01

Correlation Coefficient

Reliance Steel  General Dynamics

Significant diversification

The 3 months correlation between Reliance and General is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Steel Aluminum and General Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General 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 General Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Dynamics has no effect on the direction of Reliance Steel i.e., Reliance Steel and General Dynamics go up and down completely randomly.

Pair Corralation between Reliance Steel and General Dynamics

Assuming the 90 days horizon Reliance Steel Aluminum is expected to generate 1.33 times more return on investment than General Dynamics. However, Reliance Steel is 1.33 times more volatile than General Dynamics. It trades about 0.14 of its potential returns per unit of risk. General Dynamics is currently generating about -0.03 per unit of risk. If you would invest  24,569  in Reliance Steel Aluminum on September 13, 2024 and sell it today you would earn a total of  4,521  from holding Reliance Steel Aluminum or generate 18.4% return on investment over 90 days.

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

Reliance Steel Aluminum  vs.  General Dynamics

Reliance Steel Aluminum

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Reliance Steel Aluminum are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Reliance Steel reported solid returns over the last few months and may actually be approaching a breakup point.

General Dynamics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days General Dynamics has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, General Dynamics is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Reliance Steel and General Dynamics

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

The idea behind Reliance Steel Aluminum and General 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.