Correlation Between Steel Dynamics and X Square

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

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

Diversification Opportunities for Steel Dynamics and X Square

0.74

Correlation Coefficient

Steel Dynamics  X Square

Poor diversification

The 3 months correlation between Steel and SQCBX is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and X Square Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on X Square Balanced 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 X Square. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of X Square Balanced has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and X Square go up and down completely randomly.

Pair Corralation between Steel Dynamics and X Square

Given the investment horizon of 90 days Steel Dynamics is expected to under-perform the X Square. In addition to that, Steel Dynamics is 2.96 times more volatile than X Square Balanced. It trades about -0.04 of its total potential returns per unit of risk. X Square Balanced is currently generating about -0.07 per unit of volatility. If you would invest  1,364  in X Square Balanced on December 1, 2024 and sell it today you would lose (42.00) from holding X Square Balanced or give up 3.08% of portfolio value over 90 days.

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

Steel Dynamics  vs.  X Square Balanced

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.

X Square Balanced

Risk-Adjusted Performance

Very Weak

Over the last 90 days X Square Balanced has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, X Square is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Steel Dynamics and X Square

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

The idea behind Steel Dynamics and X Square Balanced 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.