Correlation Between STMicroelectronics and MagnaChip Semiconductor

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

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

Diversification Opportunities for STMicroelectronics and MagnaChip Semiconductor

0.79

Correlation Coefficient

STMicroelectronics  MagnaChip Semiconductor

Poor diversification

The 3 months correlation between STMicroelectronics and MagnaChip is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV ADR and MagnaChip Semiconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MagnaChip Semiconductor and STMicroelectronics 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 STMicroelectronics NV ADR are associated (or correlated) with MagnaChip Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MagnaChip Semiconductor has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and MagnaChip Semiconductor go up and down completely randomly.

Pair Corralation between STMicroelectronics and MagnaChip Semiconductor

Considering the 90-day investment horizon STMicroelectronics NV ADR is expected to generate 0.73 times more return on investment than MagnaChip Semiconductor. However, STMicroelectronics NV ADR is 1.38 times less risky than MagnaChip Semiconductor. It trades about -0.03 of its potential returns per unit of risk. MagnaChip Semiconductor is currently generating about -0.06 per unit of risk. If you would invest  2,773  in STMicroelectronics NV ADR on September 14, 2024 and sell it today you would lose (150.00) from holding STMicroelectronics NV ADR or give up 5.41% of portfolio value over 90 days.

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

STMicroelectronics NV ADR  vs.  MagnaChip Semiconductor

STMicroelectronics NV ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, STMicroelectronics is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

MagnaChip Semiconductor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MagnaChip Semiconductor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators 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 STMicroelectronics and MagnaChip Semiconductor

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

The idea behind STMicroelectronics NV ADR and MagnaChip 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.

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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .