Correlation Between Steel Dynamics and STMicroelectronics

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

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

Diversification Opportunities for Steel Dynamics and STMicroelectronics

0.06

Correlation Coefficient

Steel Dynamics  STMicroelectronics

Significant diversification

The 3 months correlation between Steel and STMicroelectronics is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and STMicroelectronics NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics 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 STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and STMicroelectronics go up and down completely randomly.

Pair Corralation between Steel Dynamics and STMicroelectronics

Given the investment horizon of 90 days Steel Dynamics is expected to under-perform the STMicroelectronics. But the stock apears to be less risky and, when comparing its historical volatility, Steel Dynamics is 1.35 times less risky than STMicroelectronics. The stock trades about -0.04 of its potential returns per unit of risk. The STMicroelectronics NV is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  2,444  in STMicroelectronics NV on December 2, 2024 and sell it today you would lose (75.00) from holding STMicroelectronics NV or give up 3.07% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.83%
Values	Daily Returns

Steel Dynamics  vs.  STMicroelectronics NV

Steel Dynamics

Risk-Adjusted Performance

Very Weak

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

STMicroelectronics

Risk-Adjusted Performance

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, STMicroelectronics is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Steel Dynamics and STMicroelectronics

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

The idea behind Steel Dynamics and STMicroelectronics NV 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.