Correlation Between SM Energy and Steel Dynamics

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

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

Diversification Opportunities for SM Energy and Steel Dynamics

0.92

Correlation Coefficient

SM Energy  Steel Dynamics

Almost no diversification

The 3 months correlation between SM Energy and Steel is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding SM Energy Co and Steel Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Steel Dynamics and SM Energy 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 SM Energy Co are associated (or correlated) with Steel Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Steel Dynamics has no effect on the direction of SM Energy i.e., SM Energy and Steel Dynamics go up and down completely randomly.

Pair Corralation between SM Energy and Steel Dynamics

Allowing for the 90-day total investment horizon SM Energy Co is expected to generate 1.0 times more return on investment than Steel Dynamics. However, SM Energy Co is 1.0 times less risky than Steel Dynamics. It trades about 0.04 of its potential returns per unit of risk. Steel Dynamics is currently generating about -0.36 per unit of risk. If you would invest  5,040  in SM Energy Co on January 31, 2024 and sell it today you would earn a total of  44.00  from holding SM Energy Co or generate 0.87% return on investment over 90 days.

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

SM Energy Co  vs.  Steel Dynamics

SM Energy

Risk-Adjusted Performance

26 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in SM Energy Co are ranked lower than 26 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady primary indicators, SM Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Steel Dynamics

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Steel Dynamics may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with SM Energy and Steel Dynamics

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

The idea behind SM Energy Co and Steel Dynamics 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..