Correlation Between STMicroelectronics and Shenzhen Investment

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

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

Diversification Opportunities for STMicroelectronics and Shenzhen Investment

0.4

Correlation Coefficient

STMicroelectronics  Shenzhen Investment

Very weak diversification

The 3 months correlation between STMicroelectronics and Shenzhen is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and Shenzhen Investment Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shenzhen Investment 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 Shenzhen Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shenzhen Investment has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and Shenzhen Investment go up and down completely randomly.

Pair Corralation between STMicroelectronics and Shenzhen Investment

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the Shenzhen Investment. But the stock apears to be less risky and, when comparing its historical volatility, STMicroelectronics NV is 2.45 times less risky than Shenzhen Investment. The stock trades about -0.04 of its potential returns per unit of risk. The Shenzhen Investment Limited is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  15.00  in Shenzhen Investment Limited on October 27, 2024 and sell it today you would lose (6.10) from holding Shenzhen Investment Limited or give up 40.67% 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.  Shenzhen Investment Limited

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

Shenzhen Investment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shenzhen Investment Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile 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.

Pair Trading with STMicroelectronics and Shenzhen Investment

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

The idea behind STMicroelectronics NV and Shenzhen Investment Limited 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.