Correlation Between Applied Materials and Norsk Hydro

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

By analyzing existing cross correlation between Applied Materials and Norsk Hydro ASA, you can compare the effects of market volatilities on Applied Materials and Norsk Hydro 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 Norsk Hydro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Applied Materials and Norsk Hydro.

Diversification Opportunities for Applied Materials and Norsk Hydro

-0.14

Correlation Coefficient

Applied Materials  Norsk Hydro

Good diversification

The 3 months correlation between Applied and Norsk is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Norsk Hydro ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norsk Hydro ASA 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 Norsk Hydro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norsk Hydro ASA has no effect on the direction of Applied Materials i.e., Applied Materials and Norsk Hydro go up and down completely randomly.

Pair Corralation between Applied Materials and Norsk Hydro

Assuming the 90 days horizon Applied Materials is expected to under-perform the Norsk Hydro. But the stock apears to be less risky and, when comparing its historical volatility, Applied Materials is 1.08 times less risky than Norsk Hydro. The stock trades about -0.02 of its potential returns per unit of risk. The Norsk Hydro ASA is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  522.00  in Norsk Hydro ASA on September 16, 2024 and sell it today you would earn a total of  41.00  from holding Norsk Hydro ASA or generate 7.85% return on investment over 90 days.

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

Applied Materials  vs.  Norsk Hydro ASA

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 newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Norsk Hydro ASA

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Norsk Hydro ASA are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain technical indicators, Norsk Hydro may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Applied Materials and Norsk Hydro

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

The idea behind Applied Materials and Norsk Hydro ASA 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.