Correlation Between STMicroelectronics and NXP Semiconductors

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

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

Diversification Opportunities for STMicroelectronics and NXP Semiconductors

0.7

Correlation Coefficient

STMicroelectronics  NXP Semiconductors

Poor diversification

The 3 months correlation between STMicroelectronics and NXP is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and NXP Semiconductors NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXP Semiconductors 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 are associated (or correlated) with NXP Semiconductors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXP Semiconductors has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and NXP Semiconductors go up and down completely randomly.

Pair Corralation between STMicroelectronics and NXP Semiconductors

Assuming the 90 days horizon STMicroelectronics NV is expected to under-perform the NXP Semiconductors. In addition to that, STMicroelectronics is 1.6 times more volatile than NXP Semiconductors NV. It trades about -0.06 of its total potential returns per unit of risk. NXP Semiconductors NV is currently generating about -0.06 per unit of volatility. If you would invest  23,186  in NXP Semiconductors NV on September 23, 2024 and sell it today you would lose (2,162) from holding NXP Semiconductors NV or give up 9.32% of portfolio value over 90 days.

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

STMicroelectronics NV  vs.  NXP Semiconductors NV

STMicroelectronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

NXP Semiconductors

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NXP Semiconductors NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest inconsistent performance, the Stock's basic indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Pair Trading with STMicroelectronics and NXP Semiconductors

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

The idea behind STMicroelectronics NV and NXP Semiconductors NV 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 Stocks Directory module to find actively traded stocks across global markets.