Correlation Between Applied Materials and Goodyear Tire

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

By analyzing existing cross correlation between Applied Materials and Goodyear Tire Rubber, you can compare the effects of market volatilities on Applied Materials and Goodyear Tire 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 Applied Materials with a short position of Goodyear Tire. Check out your portfolio center. Please also check ongoing floating volatility patterns of Applied Materials and Goodyear Tire.

Diversification Opportunities for Applied Materials and Goodyear Tire

0.06

Correlation Coefficient

Applied Materials  Goodyear Tire

Significant diversification

The 3 months correlation between Applied and Goodyear is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Goodyear Tire Rubber in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Goodyear Tire Rubber and Applied Materials 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 Applied Materials are associated (or correlated) with Goodyear Tire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Goodyear Tire Rubber has no effect on the direction of Applied Materials i.e., Applied Materials and Goodyear Tire go up and down completely randomly.

Pair Corralation between Applied Materials and Goodyear Tire

Assuming the 90 days horizon Applied Materials is expected to generate 1.83 times more return on investment than Goodyear Tire. However, Applied Materials is 1.83 times more volatile than Goodyear Tire Rubber. It trades about 0.37 of its potential returns per unit of risk. Goodyear Tire Rubber is currently generating about 0.46 per unit of risk. If you would invest  12,310  in Applied Materials on February 15, 2025 and sell it today you would earn a total of  3,340  from holding Applied Materials or generate 27.13% return on investment over 90 days.

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

Applied Materials  vs.  Goodyear Tire Rubber

Applied Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Applied Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Goodyear Tire Rubber

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Goodyear Tire Rubber are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Goodyear Tire unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Applied Materials and Goodyear Tire

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

The idea behind Applied Materials and Goodyear Tire Rubber 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.