Correlation Between Globalfoundries and STMicroelectronics

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

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

Diversification Opportunities for Globalfoundries and STMicroelectronics

0.71

Correlation Coefficient

Globalfoundries  STMicroelectronics

Poor diversification

The 3 months correlation between Globalfoundries and STMicroelectronics is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Globalfoundries and STMicroelectronics NV ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics NV ADR and Globalfoundries 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 Globalfoundries are associated (or correlated) with STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics NV ADR has no effect on the direction of Globalfoundries i.e., Globalfoundries and STMicroelectronics go up and down completely randomly.

Pair Corralation between Globalfoundries and STMicroelectronics

Considering the 90-day investment horizon Globalfoundries is expected to under-perform the STMicroelectronics. But the stock apears to be less risky and, when comparing its historical volatility, Globalfoundries is 1.01 times less risky than STMicroelectronics. The stock trades about -0.15 of its potential returns per unit of risk. The STMicroelectronics NV ADR is currently generating about -0.14 of returns per unit of risk over similar time horizon. If you would invest  4,469  in STMicroelectronics NV ADR on January 24, 2024 and sell it today you would lose (544.00) from holding STMicroelectronics NV ADR or give up 12.17% of portfolio value over 90 days.

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

Globalfoundries  vs.  STMicroelectronics NV ADR

Globalfoundries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Globalfoundries has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's technical and fundamental indicators remain comparatively stable which may send shares a bit higher in May 2024. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

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 unfluctuating performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in May 2024. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Globalfoundries and STMicroelectronics

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

The idea behind Globalfoundries and STMicroelectronics NV ADR 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.