Correlation Between Steel Dynamics and Babcock Wilcox

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

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

Diversification Opportunities for Steel Dynamics and Babcock Wilcox

0.67

Correlation Coefficient

Steel Dynamics  Babcock Wilcox

Poor diversification

The 3 months correlation between Steel and Babcock is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Babcock Wilcox Enterprises, in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Babcock Wilcox Enter 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 Babcock Wilcox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Babcock Wilcox Enter has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Babcock Wilcox go up and down completely randomly.

Pair Corralation between Steel Dynamics and Babcock Wilcox

Given the investment horizon of 90 days Steel Dynamics is expected to generate 1.92 times more return on investment than Babcock Wilcox. However, Steel Dynamics is 1.92 times more volatile than Babcock Wilcox Enterprises,. It trades about 0.24 of its potential returns per unit of risk. Babcock Wilcox Enterprises, is currently generating about 0.11 per unit of risk. If you would invest  11,193  in Steel Dynamics on December 2, 2024 and sell it today you would earn a total of  2,314  from holding Steel Dynamics or generate 20.67% return on investment over 90 days.

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

Steel Dynamics  vs.  Babcock Wilcox Enterprises,

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.

Babcock Wilcox Enter

Risk-Adjusted Performance

Very Weak

Over the last 90 days Babcock Wilcox Enterprises, has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Babcock Wilcox is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Steel Dynamics and Babcock Wilcox

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

The idea behind Steel Dynamics and Babcock Wilcox Enterprises, 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.