Correlation Between Sterling Construction and SIMS METAL

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

By analyzing existing cross correlation between Sterling Construction and SIMS METAL MGT, you can compare the effects of market volatilities on Sterling Construction and SIMS METAL 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 Sterling Construction with a short position of SIMS METAL. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sterling Construction and SIMS METAL.

Diversification Opportunities for Sterling Construction and SIMS METAL

0.67

Correlation Coefficient

Sterling Construction  SIMS METAL

Poor diversification

The 3 months correlation between Sterling and SIMS is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Sterling Construction and SIMS METAL MGT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SIMS METAL MGT and Sterling Construction 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 Sterling Construction are associated (or correlated) with SIMS METAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SIMS METAL MGT has no effect on the direction of Sterling Construction i.e., Sterling Construction and SIMS METAL go up and down completely randomly.

Pair Corralation between Sterling Construction and SIMS METAL

Assuming the 90 days horizon Sterling Construction is expected to under-perform the SIMS METAL. In addition to that, Sterling Construction is 1.15 times more volatile than SIMS METAL MGT. It trades about -0.09 of its total potential returns per unit of risk. SIMS METAL MGT is currently generating about -0.03 per unit of volatility. If you would invest  810.00  in SIMS METAL MGT on September 12, 2024 and sell it today you would lose (15.00) from holding SIMS METAL MGT or give up 1.85% of portfolio value over 90 days.

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

Sterling Construction  vs.  SIMS METAL MGT

Sterling Construction

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sterling Construction are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sterling Construction reported solid returns over the last few months and may actually be approaching a breakup point.

SIMS METAL MGT

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SIMS METAL MGT are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain primary indicators, SIMS METAL exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sterling Construction and SIMS METAL

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

The idea behind Sterling Construction and SIMS METAL MGT 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.