Correlation Between SIMS METAL and ServiceNow

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

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

Diversification Opportunities for SIMS METAL and ServiceNow

0.63

Correlation Coefficient

SIMS METAL  ServiceNow

Poor diversification

The 3 months correlation between SIMS and ServiceNow is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding SIMS METAL MGT and ServiceNow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ServiceNow and SIMS METAL 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 SIMS METAL MGT are associated (or correlated) with ServiceNow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ServiceNow has no effect on the direction of SIMS METAL i.e., SIMS METAL and ServiceNow go up and down completely randomly.

Pair Corralation between SIMS METAL and ServiceNow

Assuming the 90 days trading horizon SIMS METAL is expected to generate 1.27 times less return on investment than ServiceNow. In addition to that, SIMS METAL is 1.4 times more volatile than ServiceNow. It trades about 0.14 of its total potential returns per unit of risk. ServiceNow is currently generating about 0.25 per unit of volatility. If you would invest  75,390  in ServiceNow on September 3, 2024 and sell it today you would earn a total of  23,430  from holding ServiceNow or generate 31.08% return on investment over 90 days.

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

SIMS METAL MGT  vs.  ServiceNow

SIMS METAL MGT

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SIMS METAL MGT are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady primary indicators, SIMS METAL exhibited solid returns over the last few months and may actually be approaching a breakup point.

ServiceNow

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in ServiceNow are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, ServiceNow reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with SIMS METAL and ServiceNow

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

The idea behind SIMS METAL MGT and ServiceNow 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.