Can any of the company-specific risk be diversified away by investing in both Micron Technology and Applied Materials 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 Micron Technology and Applied Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Micron Technology and Applied Materials, you can compare the effects of market volatilities on Micron Technology and Applied Materials 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 Micron Technology with a short position of Applied Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Micron Technology and Applied Materials.
Diversification Opportunities for Micron Technology and Applied Materials
The 3 months correlation between Micron and Applied is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Micron Technology and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Micron Technology 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 Micron Technology are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Micron Technology i.e., Micron Technology and Applied Materials go up and down completely randomly.
Pair Corralation between Micron Technology and Applied Materials
Assuming the 90 days horizon Micron Technology is expected to generate 1.06 times more return on investment than Applied Materials. However, Micron Technology is 1.06 times more volatile than Applied Materials. It trades about 0.18 of its potential returns per unit of risk. Applied Materials is currently generating about 0.14 per unit of risk. If you would invest 128,705 in Micron Technology on March 6, 2024 and sell it today you would earn a total of 96,995 from holding Micron Technology or generate 75.36% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Micron Technology are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak primary indicators, Micron Technology showed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Applied Materials are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Applied Materials may actually be approaching a critical reversion point that can send shares even higher in July 2024.