Correlation Between Broadcom and LG Electronics
Can any of the company-specific risk be diversified away by investing in both Broadcom and LG Electronics 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 Broadcom and LG Electronics into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Broadcom and LG Electronics, you can compare the effects of market volatilities on Broadcom and LG Electronics 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 Broadcom with a short position of LG Electronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Broadcom and LG Electronics.
Diversification Opportunities for Broadcom and LG Electronics
-0.55 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Broadcom and LGLG is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and LG Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LG Electronics and Broadcom 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 Broadcom are associated (or correlated) with LG Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LG Electronics has no effect on the direction of Broadcom i.e., Broadcom and LG Electronics go up and down completely randomly.
Pair Corralation between Broadcom and LG Electronics
Assuming the 90 days trading horizon Broadcom is expected to generate 1.94 times more return on investment than LG Electronics. However, Broadcom is 1.94 times more volatile than LG Electronics. It trades about 0.29 of its potential returns per unit of risk. LG Electronics is currently generating about -0.14 per unit of risk. If you would invest 15,650 in Broadcom on September 24, 2024 and sell it today you would earn a total of 6,145 from holding Broadcom or generate 39.27% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Broadcom vs. LG Electronics
Performance |
| Timeline |
| Broadcom |
| LG Electronics |
Broadcom and LG Electronics Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Broadcom and LG Electronics
The main advantage of trading using opposite Broadcom and LG Electronics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Broadcom position performs unexpectedly, LG Electronics 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 LG Electronics will offset losses from the drop in LG Electronics' long position.The idea behind Broadcom and LG Electronics 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.| LG Electronics vs. Apple Inc | LG Electronics vs. Apple Inc | LG Electronics vs. Apple Inc | LG Electronics vs. Apple Inc |
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 the Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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