Correlation Between STMicroelectronics and LG Electronics

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

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

Diversification Opportunities for STMicroelectronics and LG Electronics

0.49

Correlation Coefficient

STMicroelectronics  LG Electronics

Very weak diversification

The 3 months correlation between STMicroelectronics and LGLG is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and LG Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LG Electronics 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 LG Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LG Electronics has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and LG Electronics go up and down completely randomly.

Pair Corralation between STMicroelectronics and LG Electronics

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the LG Electronics. In addition to that, STMicroelectronics is 1.41 times more volatile than LG Electronics. It trades about -0.13 of its total potential returns per unit of risk. LG Electronics is currently generating about 0.03 per unit of volatility. If you would invest  1,440  in LG Electronics on August 31, 2024 and sell it today you would earn a total of  10.00  from holding LG Electronics or generate 0.69% return on investment over 90 days.

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

STMicroelectronics NV  vs.  LG Electronics

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 fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in December 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

LG Electronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LG Electronics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with STMicroelectronics and LG Electronics

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

The idea behind STMicroelectronics NV and LG Electronics 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..