Correlation Between Steel Dynamics and Applied Materials

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

By analyzing existing cross correlation between Steel Dynamics and Applied Materials, you can compare the effects of market volatilities on Steel Dynamics and Applied Materials 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 Steel Dynamics with a short position of Applied Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Steel Dynamics and Applied Materials.

Diversification Opportunities for Steel Dynamics and Applied Materials

-0.66

Correlation Coefficient

Steel Dynamics  Applied Materials

Excellent diversification

The 3 months correlation between Steel and Applied is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Steel Dynamics 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 Steel Dynamics are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Applied Materials go up and down completely randomly.

Pair Corralation between Steel Dynamics and Applied Materials

Assuming the 90 days trading horizon Steel Dynamics is expected to generate 15.69 times less return on investment than Applied Materials. But when comparing it to its historical volatility, Steel Dynamics is 23.29 times less risky than Applied Materials. It trades about 0.24 of its potential returns per unit of risk. Applied Materials is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  347,400  in Applied Materials on October 9, 2024 and sell it today you would earn a total of  16,743  from holding Applied Materials or generate 4.82% return on investment over 90 days.

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

Steel Dynamics  vs.  Applied Materials

Steel Dynamics

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Steel Dynamics showed solid returns over the last few months and may actually be approaching a breakup point.

Applied Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Steel Dynamics and Applied Materials

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

The idea behind Steel Dynamics and Applied Materials 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.