Correlation Between Steel Dynamics and Royce Small

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

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

Diversification Opportunities for Steel Dynamics and Royce Small

0.81

Correlation Coefficient

Steel Dynamics  Royce Small

Very poor diversification

The 3 months correlation between Steel and Royce is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Royce Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Small Cap 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 Royce Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Small Cap has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Royce Small go up and down completely randomly.

Pair Corralation between Steel Dynamics and Royce Small

Given the investment horizon of 90 days Steel Dynamics is expected to under-perform the Royce Small. In addition to that, Steel Dynamics is 1.51 times more volatile than Royce Small Cap Value. It trades about -0.29 of its total potential returns per unit of risk. Royce Small Cap Value is currently generating about -0.13 per unit of volatility. If you would invest  1,156  in Royce Small Cap Value on September 12, 2024 and sell it today you would lose (31.00) from holding Royce Small Cap Value or give up 2.68% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Steel Dynamics  vs.  Royce Small Cap Value

Steel Dynamics

Risk-Adjusted Performance

10 of 100

Good

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 rather fragile essential indicators, Steel Dynamics exhibited solid returns over the last few months and may actually be approaching a breakup point.

Royce Small Cap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Small Cap Value are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical indicators, Royce Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Steel Dynamics and Royce Small

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

The idea behind Steel Dynamics and Royce Small Cap Value 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.