Correlation Between LOreal SA and STMicroelectronics

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

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

Diversification Opportunities for LOreal SA and STMicroelectronics

0.76

Correlation Coefficient

LOreal SA  STMicroelectronics

Poor diversification

The 3 months correlation between LOreal and STMicroelectronics is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding LOreal SA and STMicroelectronics NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics and LOreal SA 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 LOreal SA 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 LOreal SA i.e., LOreal SA and STMicroelectronics go up and down completely randomly.

Pair Corralation between LOreal SA and STMicroelectronics

Assuming the 90 days horizon LOreal SA is expected to under-perform the STMicroelectronics. But the stock apears to be less risky and, when comparing its historical volatility, LOreal SA is 1.26 times less risky than STMicroelectronics. The stock trades about -0.13 of its potential returns per unit of risk. The STMicroelectronics NV is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  2,694  in STMicroelectronics NV on September 4, 2024 and sell it today you would lose (231.00) from holding STMicroelectronics NV or give up 8.57% of portfolio value over 90 days.

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

LOreal SA  vs.  STMicroelectronics NV

LOreal SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

STMicroelectronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest weak performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Pair Trading with LOreal SA and STMicroelectronics

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

The idea behind LOreal SA and STMicroelectronics NV 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.