Correlation Between X FAB and Microchip Technology

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

By analyzing existing cross correlation between X FAB Silicon Foundries and Microchip Technology Incorporated, you can compare the effects of market volatilities on X FAB and Microchip Technology 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 X FAB with a short position of Microchip Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of X FAB and Microchip Technology.

Diversification Opportunities for X FAB and Microchip Technology

0.6

Correlation Coefficient

X FAB  Microchip Technology

Poor diversification

The 3 months correlation between XFB and Microchip is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding X FAB Silicon Foundries and Microchip Technology Incorpora in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microchip Technology and X FAB 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 X FAB Silicon Foundries are associated (or correlated) with Microchip Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microchip Technology has no effect on the direction of X FAB i.e., X FAB and Microchip Technology go up and down completely randomly.

Pair Corralation between X FAB and Microchip Technology

Assuming the 90 days trading horizon X FAB Silicon Foundries is expected to under-perform the Microchip Technology. In addition to that, X FAB is 1.48 times more volatile than Microchip Technology Incorporated. It trades about -0.07 of its total potential returns per unit of risk. Microchip Technology Incorporated is currently generating about 0.0 per unit of volatility. If you would invest  6,858  in Microchip Technology Incorporated on September 5, 2024 and sell it today you would lose (130.00) from holding Microchip Technology Incorporated or give up 1.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

X FAB Silicon Foundries  vs.  Microchip Technology Incorpora

X FAB Silicon

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days X FAB Silicon Foundries has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's fundamental drivers remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Microchip Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Microchip Technology Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Microchip Technology is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with X FAB and Microchip Technology

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

The idea behind X FAB Silicon Foundries and Microchip Technology Incorporated 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.