Correlation Between STMicroelectronics and HDFC Bank

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

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

Diversification Opportunities for STMicroelectronics and HDFC Bank

-0.11

Correlation Coefficient

STMicroelectronics  HDFC Bank

Good diversification

The 3 months correlation between STMicroelectronics and HDFC is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and HDFC Bank Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HDFC Bank Limited 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 HDFC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HDFC Bank Limited has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and HDFC Bank go up and down completely randomly.

Pair Corralation between STMicroelectronics and HDFC Bank

Assuming the 90 days trading horizon STMicroelectronics is expected to generate 8.93 times less return on investment than HDFC Bank. But when comparing it to its historical volatility, STMicroelectronics NV is 1.57 times less risky than HDFC Bank. It trades about 0.01 of its potential returns per unit of risk. HDFC Bank Limited is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  7,031  in HDFC Bank Limited on September 13, 2024 and sell it today you would earn a total of  921.00  from holding HDFC Bank Limited or generate 13.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

STMicroelectronics NV  vs.  HDFC Bank Limited

STMicroelectronics

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in STMicroelectronics NV are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong primary indicators, STMicroelectronics is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

HDFC Bank Limited

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain fundamental indicators, HDFC Bank sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with STMicroelectronics and HDFC Bank

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

The idea behind STMicroelectronics NV and HDFC Bank Limited 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.