Correlation Between Analog Devices and STMicroelectronics

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

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

Diversification Opportunities for Analog Devices and STMicroelectronics

0.86

Correlation Coefficient

Analog Devices  STMicroelectronics

Very poor diversification

The 3 months correlation between Analog and STMicroelectronics is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Analog Devices and STMicroelectronics NV ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics NV ADR and Analog Devices 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 Analog Devices are associated (or correlated) with STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics NV ADR has no effect on the direction of Analog Devices i.e., Analog Devices and STMicroelectronics go up and down completely randomly.

Pair Corralation between Analog Devices and STMicroelectronics

Considering the 90-day investment horizon Analog Devices is expected to generate 6.16 times less return on investment than STMicroelectronics. But when comparing it to its historical volatility, Analog Devices is 1.1 times less risky than STMicroelectronics. It trades about 0.01 of its potential returns per unit of risk. STMicroelectronics NV ADR is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,548  in STMicroelectronics NV ADR on September 27, 2024 and sell it today you would earn a total of  20.00  from holding STMicroelectronics NV ADR or generate 0.78% return on investment over 90 days.

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

Analog Devices  vs.  STMicroelectronics NV ADR

Analog Devices

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Analog Devices has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong fundamental indicators, Analog Devices is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

STMicroelectronics NV ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Analog Devices and STMicroelectronics

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

The idea behind Analog Devices and STMicroelectronics NV ADR 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.