Correlation Between STMicroelectronics and Trane Technologies

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

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

Diversification Opportunities for STMicroelectronics and Trane Technologies

-0.09

Correlation Coefficient

STMicroelectronics  Trane Technologies

Good diversification

The 3 months correlation between STMicroelectronics and Trane is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and Trane Technologies plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trane Technologies plc 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 Trane Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trane Technologies plc has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and Trane Technologies go up and down completely randomly.

Pair Corralation between STMicroelectronics and Trane Technologies

Assuming the 90 days trading horizon STMicroelectronics NV is expected to generate 0.88 times more return on investment than Trane Technologies. However, STMicroelectronics NV is 1.14 times less risky than Trane Technologies. It trades about -0.27 of its potential returns per unit of risk. Trane Technologies plc is currently generating about -0.28 per unit of risk. If you would invest  15,968  in STMicroelectronics NV on October 8, 2024 and sell it today you would lose (950.00) from holding STMicroelectronics NV or give up 5.95% of portfolio value over 90 days.

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

STMicroelectronics NV  vs.  Trane Technologies plc

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 somewhat strong primary indicators, STMicroelectronics is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Trane Technologies plc

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Trane Technologies plc are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Trane Technologies sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with STMicroelectronics and Trane Technologies

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

The idea behind STMicroelectronics NV and Trane Technologies plc 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.