Correlation Between Sumitomo Mitsui and NXP Semiconductors

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

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

Diversification Opportunities for Sumitomo Mitsui and NXP Semiconductors

0.3

Correlation Coefficient

Sumitomo Mitsui  NXP Semiconductors

Weak diversification

The 3 months correlation between Sumitomo and NXP is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Sumitomo Mitsui Financial and NXP Semiconductors NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXP Semiconductors and Sumitomo Mitsui 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 Sumitomo Mitsui Financial are associated (or correlated) with NXP Semiconductors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXP Semiconductors has no effect on the direction of Sumitomo Mitsui i.e., Sumitomo Mitsui and NXP Semiconductors go up and down completely randomly.

Pair Corralation between Sumitomo Mitsui and NXP Semiconductors

Assuming the 90 days trading horizon Sumitomo Mitsui Financial is expected to generate 1.01 times more return on investment than NXP Semiconductors. However, Sumitomo Mitsui is 1.01 times more volatile than NXP Semiconductors NV. It trades about 0.24 of its potential returns per unit of risk. NXP Semiconductors NV is currently generating about 0.15 per unit of risk. If you would invest  7,992  in Sumitomo Mitsui Financial on September 20, 2024 and sell it today you would earn a total of  1,035  from holding Sumitomo Mitsui Financial or generate 12.95% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Sumitomo Mitsui Financial  vs.  NXP Semiconductors NV

Sumitomo Mitsui Financial

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sumitomo Mitsui Financial are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain primary indicators, Sumitomo Mitsui sustained solid returns over the last few months and may actually be approaching a breakup point.

NXP Semiconductors

Risk-Adjusted Performance

4 of 100

Insignificant

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

Pair Trading with Sumitomo Mitsui and NXP Semiconductors

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

The idea behind Sumitomo Mitsui Financial and NXP Semiconductors 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.