Correlation Between STMicroelectronics and American Electric

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

By analyzing existing cross correlation between STMicroelectronics NV and American Electric Power, you can compare the effects of market volatilities on STMicroelectronics and American Electric 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 American Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of STMicroelectronics and American Electric.

Diversification Opportunities for STMicroelectronics and American Electric

-0.3

Correlation Coefficient

STMicroelectronics  American Electric

Very good diversification

The 3 months correlation between STMicroelectronics and American is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power 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 NV are associated (or correlated) with American Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and American Electric go up and down completely randomly.

Pair Corralation between STMicroelectronics and American Electric

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the American Electric. In addition to that, STMicroelectronics is 1.65 times more volatile than American Electric Power. It trades about -0.05 of its total potential returns per unit of risk. American Electric Power is currently generating about -0.01 per unit of volatility. If you would invest  8,756  in American Electric Power on October 9, 2024 and sell it today you would lose (106.00) from holding American Electric Power or give up 1.21% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.33%
Values	Daily Returns

STMicroelectronics NV  vs.  American Electric Power

STMicroelectronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

American Electric Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, American Electric is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with STMicroelectronics and American Electric

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

The idea behind STMicroelectronics NV and American Electric Power 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.