Correlation Between STMICROELECTRONICS and AIR CHINA

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

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

Diversification Opportunities for STMICROELECTRONICS and AIR CHINA

-0.07

Correlation Coefficient

STMICROELECTRONICS  AIR CHINA

Good diversification

The 3 months correlation between STMICROELECTRONICS and AIR is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding STMICROELECTRONICS and AIR CHINA LTD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AIR CHINA LTD and STMICROELECTRONICS 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 STMICROELECTRONICS are associated (or correlated) with AIR CHINA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AIR CHINA LTD has no effect on the direction of STMICROELECTRONICS i.e., STMICROELECTRONICS and AIR CHINA go up and down completely randomly.

Pair Corralation between STMICROELECTRONICS and AIR CHINA

Assuming the 90 days trading horizon STMICROELECTRONICS is expected to under-perform the AIR CHINA. But the stock apears to be less risky and, when comparing its historical volatility, STMICROELECTRONICS is 1.07 times less risky than AIR CHINA. The stock trades about -0.03 of its potential returns per unit of risk. The AIR CHINA LTD is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,260  in AIR CHINA LTD on December 26, 2024 and sell it today you would lose (60.00) from holding AIR CHINA LTD or give up 4.76% of portfolio value over 90 days.

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

STMICROELECTRONICS  vs.  AIR CHINA LTD

STMICROELECTRONICS

Risk-Adjusted Performance

Very Weak

Over the last 90 days STMICROELECTRONICS has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, STMICROELECTRONICS is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

AIR CHINA LTD

Risk-Adjusted Performance

Very Weak

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

Pair Trading with STMICROELECTRONICS and AIR CHINA

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

The idea behind STMICROELECTRONICS and AIR CHINA LTD 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.