Correlation Between STMicroelectronics and Digital China

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

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

Diversification Opportunities for STMicroelectronics and Digital China

-0.46

Correlation Coefficient

STMicroelectronics  Digital China

Very good diversification

The 3 months correlation between STMicroelectronics and Digital is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and Digital China Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital China Holdings 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 Digital China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital China Holdings has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and Digital China go up and down completely randomly.

Pair Corralation between STMicroelectronics and Digital China

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the Digital China. But the stock apears to be less risky and, when comparing its historical volatility, STMicroelectronics NV is 1.58 times less risky than Digital China. The stock trades about -0.02 of its potential returns per unit of risk. The Digital China Holdings is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  33.00  in Digital China Holdings on October 25, 2024 and sell it today you would earn a total of  3.00  from holding Digital China Holdings or generate 9.09% return on investment over 90 days.

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

STMicroelectronics NV  vs.  Digital China Holdings

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 nearly stable basic indicators, STMicroelectronics is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Digital China Holdings

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Digital China Holdings are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Digital China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with STMicroelectronics and Digital China

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

The idea behind STMicroelectronics NV and Digital China Holdings 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.