Correlation Between Applied Materials and Nasdaq

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Can any of the company-specific risk be diversified away by investing in both Applied Materials and Nasdaq 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 Applied Materials and Nasdaq into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Applied Materials and Nasdaq, you can compare the effects of market volatilities on Applied Materials and Nasdaq 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 Applied Materials with a short position of Nasdaq. Check out your portfolio center. Please also check ongoing floating volatility patterns of Applied Materials and Nasdaq.

Diversification Opportunities for Applied Materials and Nasdaq

0.87
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Applied and Nasdaq is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Nasdaq in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq and Applied Materials 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 Applied Materials are associated (or correlated) with Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq has no effect on the direction of Applied Materials i.e., Applied Materials and Nasdaq go up and down completely randomly.
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Pair Corralation between Applied Materials and Nasdaq

Given the investment horizon of 90 days Applied Materials is expected to under-perform the Nasdaq. In addition to that, Applied Materials is 1.45 times more volatile than Nasdaq. It trades about -0.29 of its total potential returns per unit of risk. Nasdaq is currently generating about -0.09 per unit of volatility. If you would invest  1,213,113  in Nasdaq on March 28, 2022 and sell it today you would lose (52,351)  from holding Nasdaq or give up 4.32% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Applied Materials  vs.  Nasdaq

 Performance (%) 
      Timeline 

Applied Materials and Nasdaq Volatility Contrast

 Predicted Return Density 
      Returns 

Applied Materials

Pair trading matchups for Applied Materials

T Rowe vs. Applied Materials
Nextera Energy vs. Applied Materials
T Rowe vs. Applied Materials
Ipath SP vs. Applied Materials
Citigroup vs. Applied Materials
SP 500 vs. Applied Materials
Principal Financial vs. Applied Materials
T Rowe vs. Applied Materials
GM vs. Applied Materials
Visa vs. Applied Materials
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Applied Materials as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Applied Materials' systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Applied Materials' unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Applied Materials.

Nasdaq

Pair trading matchups for Nasdaq

SP 500 vs. Nasdaq
Citigroup vs. Nasdaq
Ipath SP vs. Nasdaq
Principal Financial vs. Nasdaq
GM vs. Nasdaq
T Rowe vs. Nasdaq
IpathB SP vs. Nasdaq
Visa vs. Nasdaq
T Rowe vs. Nasdaq
Nextera Energy vs. Nasdaq
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Nasdaq as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Nasdaq's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Nasdaq's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Nasdaq.

Pair Trading with Applied Materials and Nasdaq

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

Applied Materials

Pair trading matchups for Applied Materials

Microsoft Corp vs. Applied Materials
Principal Financial vs. Applied Materials
T Rowe vs. Applied Materials
Walker Dunlop vs. Applied Materials
Twitter vs. Applied Materials
IpathB SP vs. Applied Materials
Visa vs. Applied Materials
T Rowe vs. Applied Materials
T Rowe vs. Applied Materials
Nextera Energy vs. Applied Materials
Meta Platforms vs. Applied Materials
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Applied Materials as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Applied Materials' systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Applied Materials' unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Applied Materials.
The idea behind Applied Materials and Nasdaq 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.

Nasdaq

Pair trading matchups for Nasdaq

T Rowe vs. Nasdaq
T Rowe vs. Nasdaq
Visa vs. Nasdaq
Principal Financial vs. Nasdaq
GM vs. Nasdaq
Meta Platforms vs. Nasdaq
Ipath SP vs. Nasdaq
Nextera Energy vs. Nasdaq
T Rowe vs. Nasdaq
Microsoft Corp vs. Nasdaq
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Nasdaq as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Nasdaq's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Nasdaq's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Nasdaq.
Check out your portfolio center. 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 CEO Directory module to screen CEOs from public companies around the world.

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