Correlation Between Lam Research and Applied Materials

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

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

Diversification Opportunities for Lam Research and Applied Materials

0.02

Correlation Coefficient

Lam Research  Applied Materials

Significant diversification

The 3 months correlation between Lam and Applied is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Lam Research and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Lam Research 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 Lam Research are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Lam Research i.e., Lam Research and Applied Materials go up and down completely randomly.

Pair Corralation between Lam Research and Applied Materials

Assuming the 90 days horizon Lam Research is expected to generate 1.05 times more return on investment than Applied Materials. However, Lam Research is 1.05 times more volatile than Applied Materials. It trades about 0.35 of its potential returns per unit of risk. Applied Materials is currently generating about 0.04 per unit of risk. If you would invest  6,705  in Lam Research on September 18, 2024 and sell it today you would earn a total of  745.00  from holding Lam Research or generate 11.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	57.14%
Values	Daily Returns

Lam Research  vs.  Applied Materials

Lam Research

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Lam Research has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Lam Research may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Applied Materials

Risk-Adjusted Performance

0 of 100

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.

Pair Trading with Lam Research and Applied Materials

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

The idea behind Lam Research and Applied Materials 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.