Correlation Between STMicroelectronics and PSI Software

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

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

Diversification Opportunities for STMicroelectronics and PSI Software

0.51

Correlation Coefficient

STMicroelectronics  PSI Software

Very weak diversification

The 3 months correlation between STMicroelectronics and PSI is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and PSI Software AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSI Software AG 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 PSI Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSI Software AG has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and PSI Software go up and down completely randomly.

Pair Corralation between STMicroelectronics and PSI Software

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the PSI Software. In addition to that, STMicroelectronics is 1.03 times more volatile than PSI Software AG. It trades about -0.07 of its total potential returns per unit of risk. PSI Software AG is currently generating about -0.04 per unit of volatility. If you would invest  3,215  in PSI Software AG on October 4, 2024 and sell it today you would lose (1,105) from holding PSI Software AG or give up 34.37% of portfolio value over 90 days.

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

STMicroelectronics NV  vs.  PSI Software AG

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 latest stock price disturbance, may contribute to mid-run losses for the stockholders.

PSI Software AG

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with STMicroelectronics and PSI Software

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

The idea behind STMicroelectronics NV and PSI Software AG 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.