Correlation Between Steel Dynamics and Kimbell Royalty

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

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

Diversification Opportunities for Steel Dynamics and Kimbell Royalty

0.02

Correlation Coefficient

Steel Dynamics  Kimbell Royalty

Significant diversification

The 3 months correlation between Steel and Kimbell is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Kimbell Royalty Partners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kimbell Royalty Partners 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 Kimbell Royalty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kimbell Royalty Partners has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Kimbell Royalty go up and down completely randomly.

Pair Corralation between Steel Dynamics and Kimbell Royalty

Given the investment horizon of 90 days Steel Dynamics is expected to under-perform the Kimbell Royalty. In addition to that, Steel Dynamics is 1.62 times more volatile than Kimbell Royalty Partners. It trades about -0.04 of its total potential returns per unit of risk. Kimbell Royalty Partners is currently generating about -0.07 per unit of volatility. If you would invest  1,620  in Kimbell Royalty Partners on December 1, 2024 and sell it today you would lose (88.00) from holding Kimbell Royalty Partners or give up 5.43% of portfolio value over 90 days.

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

Steel Dynamics  vs.  Kimbell Royalty Partners

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.

Kimbell Royalty Partners

Risk-Adjusted Performance

Very Weak

Over the last 90 days Kimbell Royalty Partners has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Kimbell Royalty is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Steel Dynamics and Kimbell Royalty

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

The idea behind Steel Dynamics and Kimbell Royalty Partners 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.