Correlation Between STMicroelectronics and Extra Space

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

By analyzing existing cross correlation between STMicroelectronics NV and Extra Space Storage, you can compare the effects of market volatilities on STMicroelectronics and Extra Space 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 Extra Space. Check out your portfolio center. Please also check ongoing floating volatility patterns of STMicroelectronics and Extra Space.

Diversification Opportunities for STMicroelectronics and Extra Space

0.06

Correlation Coefficient

STMicroelectronics  Extra Space

Significant diversification

The 3 months correlation between STMicroelectronics and Extra is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding STMicroelectronics NV and Extra Space Storage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extra Space Storage 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 are associated (or correlated) with Extra Space. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extra Space Storage has no effect on the direction of STMicroelectronics i.e., STMicroelectronics and Extra Space go up and down completely randomly.

Pair Corralation between STMicroelectronics and Extra Space

Assuming the 90 days trading horizon STMicroelectronics NV is expected to under-perform the Extra Space. But the stock apears to be less risky and, when comparing its historical volatility, STMicroelectronics NV is 1.17 times less risky than Extra Space. The stock trades about -0.04 of its potential returns per unit of risk. The Extra Space Storage is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  24,727  in Extra Space Storage on September 5, 2024 and sell it today you would earn a total of  2,079  from holding Extra Space Storage or generate 8.41% return on investment over 90 days.

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

STMicroelectronics NV  vs.  Extra Space Storage

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. Despite somewhat strong primary indicators, STMicroelectronics is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Extra Space Storage

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Extra Space Storage are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Extra Space may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with STMicroelectronics and Extra Space

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

The idea behind STMicroelectronics NV and Extra Space Storage 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.