Correlation Between AeroVironment and Nippon Steel

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

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

Diversification Opportunities for AeroVironment and Nippon Steel

0.22

Correlation Coefficient

AeroVironment  Nippon Steel

Modest diversification

The 3 months correlation between AeroVironment and Nippon is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding AeroVironment and Nippon Steel Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nippon Steel Corp and AeroVironment 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 AeroVironment are associated (or correlated) with Nippon Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nippon Steel Corp has no effect on the direction of AeroVironment i.e., AeroVironment and Nippon Steel go up and down completely randomly.

Pair Corralation between AeroVironment and Nippon Steel

Given the investment horizon of 90 days AeroVironment is expected to generate 1.56 times more return on investment than Nippon Steel. However, AeroVironment is 1.56 times more volatile than Nippon Steel Corp. It trades about 0.06 of its potential returns per unit of risk. Nippon Steel Corp is currently generating about 0.05 per unit of risk. If you would invest  8,125  in AeroVironment on January 26, 2024 and sell it today you would earn a total of  7,705  from holding AeroVironment or generate 94.83% return on investment over 90 days.

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

AeroVironment  vs.  Nippon Steel Corp

AeroVironment

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AeroVironment are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, AeroVironment showed solid returns over the last few months and may actually be approaching a breakup point.

Nippon Steel Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nippon Steel Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, Nippon Steel is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with AeroVironment and Nippon Steel

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

The idea behind AeroVironment and Nippon Steel Corp 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 Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.