Correlation Between Sandvik AB and Telefonaktiebolaget

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

By analyzing existing cross correlation between Sandvik AB and Telefonaktiebolaget LM Ericsson, you can compare the effects of market volatilities on Sandvik AB and Telefonaktiebolaget 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 Sandvik AB with a short position of Telefonaktiebolaget. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sandvik AB and Telefonaktiebolaget.

Diversification Opportunities for Sandvik AB and Telefonaktiebolaget

0.28

Correlation Coefficient

Sandvik AB  Telefonaktiebolaget

Modest diversification

The 3 months correlation between Sandvik and Telefonaktiebolaget is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Sandvik AB and Telefonaktiebolaget LM Ericsso in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telefonaktiebolaget and Sandvik AB 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 Sandvik AB are associated (or correlated) with Telefonaktiebolaget. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telefonaktiebolaget has no effect on the direction of Sandvik AB i.e., Sandvik AB and Telefonaktiebolaget go up and down completely randomly.

Pair Corralation between Sandvik AB and Telefonaktiebolaget

Assuming the 90 days trading horizon Sandvik AB is expected to generate 0.75 times more return on investment than Telefonaktiebolaget. However, Sandvik AB is 1.33 times less risky than Telefonaktiebolaget. It trades about 0.13 of its potential returns per unit of risk. Telefonaktiebolaget LM Ericsson is currently generating about 0.09 per unit of risk. If you would invest  21,173  in Sandvik AB on February 14, 2024 and sell it today you would earn a total of  2,077  from holding Sandvik AB or generate 9.81% return on investment over 90 days.

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

Sandvik AB  vs.  Telefonaktiebolaget LM Ericsso

Sandvik AB

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sandvik AB are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Sandvik AB may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Telefonaktiebolaget

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Telefonaktiebolaget LM Ericsson are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Telefonaktiebolaget may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Sandvik AB and Telefonaktiebolaget

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

The idea behind Sandvik AB and Telefonaktiebolaget LM Ericsson 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.