Correlation Between Steel Dynamics and NIPPON STEEL

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

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

Diversification Opportunities for Steel Dynamics and NIPPON STEEL

-0.03

Correlation Coefficient

Steel Dynamics  NIPPON STEEL

Good diversification

The 3 months correlation between Steel and NIPPON is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and NIPPON STEEL SPADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NIPPON STEEL SPADR and Steel Dynamics 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 Steel Dynamics are associated (or correlated) with NIPPON STEEL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NIPPON STEEL SPADR has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and NIPPON STEEL go up and down completely randomly.

Pair Corralation between Steel Dynamics and NIPPON STEEL

Assuming the 90 days horizon Steel Dynamics is expected to under-perform the NIPPON STEEL. In addition to that, Steel Dynamics is 1.39 times more volatile than NIPPON STEEL SPADR. It trades about -0.69 of its total potential returns per unit of risk. NIPPON STEEL SPADR is currently generating about -0.18 per unit of volatility. If you would invest  610.00  in NIPPON STEEL SPADR on September 24, 2024 and sell it today you would lose (25.00) from holding NIPPON STEEL SPADR or give up 4.1% of portfolio value over 90 days.

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

Steel Dynamics  vs.  NIPPON STEEL SPADR

Steel Dynamics

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Steel Dynamics is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

NIPPON STEEL SPADR

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Steel Dynamics and NIPPON STEEL

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

The idea behind Steel Dynamics and NIPPON STEEL SPADR 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.