Correlation Between Steel Dynamics and Home Product

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

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

Diversification Opportunities for Steel Dynamics and Home Product

-0.59

Correlation Coefficient

Steel Dynamics  Home Product

Excellent diversification

The 3 months correlation between Steel and Home is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Home Product Center in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Product Center and Steel Dynamics 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 Steel Dynamics are associated (or correlated) with Home Product. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Product Center has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Home Product go up and down completely randomly.

Pair Corralation between Steel Dynamics and Home Product

Given the investment horizon of 90 days Steel Dynamics is expected to generate 1.5 times more return on investment than Home Product. However, Steel Dynamics is 1.5 times more volatile than Home Product Center. It trades about 0.14 of its potential returns per unit of risk. Home Product Center is currently generating about -0.09 per unit of risk. If you would invest  11,014  in Steel Dynamics on September 12, 2024 and sell it today you would earn a total of  2,442  from holding Steel Dynamics or generate 22.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.31%
Values	Daily Returns

Steel Dynamics  vs.  Home Product Center

Steel Dynamics

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Steel Dynamics exhibited solid returns over the last few months and may actually be approaching a breakup point.

Home Product Center

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Home Product Center has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest conflicting performance, the Stock's fundamental drivers remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Steel Dynamics and Home Product

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

The idea behind Steel Dynamics and Home Product Center 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.

Check out your portfolio center.

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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.