Correlation Between IPG Photonics and Tower Semiconductor

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

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

Diversification Opportunities for IPG Photonics and Tower Semiconductor

0.29

Correlation Coefficient

IPG Photonics  Tower Semiconductor

Modest diversification

The 3 months correlation between IPG and Tower is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding IPG Photonics and Tower Semiconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tower Semiconductor and IPG Photonics 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 IPG Photonics are associated (or correlated) with Tower Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tower Semiconductor has no effect on the direction of IPG Photonics i.e., IPG Photonics and Tower Semiconductor go up and down completely randomly.

Pair Corralation between IPG Photonics and Tower Semiconductor

Given the investment horizon of 90 days IPG Photonics is expected to generate 1.69 times less return on investment than Tower Semiconductor. But when comparing it to its historical volatility, IPG Photonics is 1.15 times less risky than Tower Semiconductor. It trades about 0.1 of its potential returns per unit of risk. Tower Semiconductor is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  4,147  in Tower Semiconductor on September 17, 2024 and sell it today you would earn a total of  1,032  from holding Tower Semiconductor or generate 24.89% return on investment over 90 days.

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

IPG Photonics  vs.  Tower Semiconductor

IPG Photonics

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in IPG Photonics are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical and fundamental indicators, IPG Photonics reported solid returns over the last few months and may actually be approaching a breakup point.

Tower Semiconductor

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tower Semiconductor are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, Tower Semiconductor displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IPG Photonics and Tower Semiconductor

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

The idea behind IPG Photonics and Tower Semiconductor 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.