Correlation Between Timken and Analog Devices

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

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

Diversification Opportunities for Timken and Analog Devices

0.27

Correlation Coefficient

Timken  Analog Devices

Modest diversification

The 3 months correlation between Timken and Analog is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Timken Company and Analog Devices in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Analog Devices and Timken 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 Timken Company are associated (or correlated) with Analog Devices. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Analog Devices has no effect on the direction of Timken i.e., Timken and Analog Devices go up and down completely randomly.

Pair Corralation between Timken and Analog Devices

Considering the 90-day investment horizon Timken is expected to generate 3.68 times less return on investment than Analog Devices. But when comparing it to its historical volatility, Timken Company is 1.27 times less risky than Analog Devices. It trades about 0.02 of its potential returns per unit of risk. Analog Devices is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  21,738  in Analog Devices on December 4, 2024 and sell it today you would earn a total of  1,115  from holding Analog Devices or generate 5.13% return on investment over 90 days.

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

Timken Company  vs.  Analog Devices

Timken Company

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Timken Company are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable forward-looking signals, Timken is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Analog Devices

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Analog Devices are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly inconsistent fundamental indicators, Analog Devices may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Timken and Analog Devices

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

The idea behind Timken Company and Analog Devices 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.