Correlation Between STMicroelectronics and Transocean

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

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

Diversification Opportunities for STMicroelectronics and Transocean

0.36

Correlation Coefficient

STMicroelectronics  Transocean

Weak diversification

The 3 months correlation between STMicroelectronics and Transocean is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV ADR and Transocean in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transocean and STMicroelectronics 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 STMicroelectronics NV ADR are associated (or correlated) with Transocean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transocean has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and Transocean go up and down completely randomly.

Pair Corralation between STMicroelectronics and Transocean

Considering the 90-day investment horizon STMicroelectronics NV ADR is expected to generate 0.62 times more return on investment than Transocean. However, STMicroelectronics NV ADR is 1.6 times less risky than Transocean. It trades about -0.18 of its potential returns per unit of risk. Transocean is currently generating about -0.14 per unit of risk. If you would invest  2,577  in STMicroelectronics NV ADR on October 5, 2024 and sell it today you would lose (147.00) from holding STMicroelectronics NV ADR or give up 5.7% of portfolio value over 90 days.

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

STMicroelectronics NV ADR  vs.  Transocean

STMicroelectronics NV ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in February 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Transocean

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Transocean has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's forward indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with STMicroelectronics and Transocean

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

The idea behind STMicroelectronics NV ADR and Transocean 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.