Correlation Between Arrow Electronics and STMICROELECTRONICS

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

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

Diversification Opportunities for Arrow Electronics and STMICROELECTRONICS

0.75

Correlation Coefficient

Arrow Electronics  STMICROELECTRONICS

Poor diversification

The 3 months correlation between Arrow and STMICROELECTRONICS is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Arrow Electronics and STMICROELECTRONICS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMICROELECTRONICS and Arrow Electronics 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 Arrow Electronics 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 has no effect on the direction of Arrow Electronics i.e., Arrow Electronics and STMICROELECTRONICS go up and down completely randomly.

Pair Corralation between Arrow Electronics and STMICROELECTRONICS

Assuming the 90 days horizon Arrow Electronics is expected to generate 1.11 times more return on investment than STMICROELECTRONICS. However, Arrow Electronics is 1.11 times more volatile than STMICROELECTRONICS. It trades about -0.04 of its potential returns per unit of risk. STMICROELECTRONICS is currently generating about -0.09 per unit of risk. If you would invest  11,800  in Arrow Electronics on September 28, 2024 and sell it today you would lose (800.00) from holding Arrow Electronics or give up 6.78% of portfolio value over 90 days.

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

Arrow Electronics  vs.  STMICROELECTRONICS

Arrow Electronics

Risk-Adjusted Performance

0 of 100

Very Weak

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

STMICROELECTRONICS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMICROELECTRONICS has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's primary indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Arrow Electronics and STMICROELECTRONICS

The main advantage of trading using opposite Arrow Electronics and STMICROELECTRONICS positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Arrow Electronics 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's long position.

The idea behind Arrow Electronics and STMICROELECTRONICS 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.