Correlation Between IShares Global and Steel Dynamics

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

By analyzing existing cross correlation between iShares Global Timber and Steel Dynamics, you can compare the effects of market volatilities on IShares Global and Steel Dynamics 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 IShares Global with a short position of Steel Dynamics. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Global and Steel Dynamics.

Diversification Opportunities for IShares Global and Steel Dynamics

-0.44

Correlation Coefficient

IShares Global  Steel Dynamics

Very good diversification

The 3 months correlation between IShares and Steel is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding iShares Global Timber and Steel Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Steel Dynamics and IShares Global 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 iShares Global Timber are associated (or correlated) with Steel Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Steel Dynamics has no effect on the direction of IShares Global i.e., IShares Global and Steel Dynamics go up and down completely randomly.

Pair Corralation between IShares Global and Steel Dynamics

Assuming the 90 days trading horizon IShares Global is expected to generate 20.14 times less return on investment than Steel Dynamics. But when comparing it to its historical volatility, iShares Global Timber is 38.08 times less risky than Steel Dynamics. It trades about 0.08 of its potential returns per unit of risk. Steel Dynamics is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  218,953  in Steel Dynamics on December 4, 2024 and sell it today you would earn a total of  56,058  from holding Steel Dynamics or generate 25.6% return on investment over 90 days.

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

iShares Global Timber  vs.  Steel Dynamics

iShares Global Timber

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Global Timber are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, IShares Global is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Steel Dynamics

Risk-Adjusted Performance

Very Weak

Over the last 90 days Steel Dynamics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with IShares Global and Steel Dynamics

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

The idea behind iShares Global Timber and Steel Dynamics 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.