Correlation Between Novartis and GlaxoSmithKline PLC

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

Diversification Opportunities for Novartis and GlaxoSmithKline PLC

-0.31
  Correlation Coefficient

Very good diversification

The 3 months correlation between Novartis and GlaxoSmithKline is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Novartis AG ADR and GlaxoSmithKline PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GlaxoSmithKline PLC ADR and Novartis 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 Novartis AG ADR are associated (or correlated) with GlaxoSmithKline PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GlaxoSmithKline PLC ADR has no effect on the direction of Novartis i.e., Novartis and GlaxoSmithKline PLC go up and down completely randomly.

Pair Corralation between Novartis and GlaxoSmithKline PLC

Considering the 90-day investment horizon Novartis is expected to generate 1.53 times less return on investment than GlaxoSmithKline PLC. But when comparing it to its historical volatility, Novartis AG ADR is 1.07 times less risky than GlaxoSmithKline PLC. It trades about 0.05 of its potential returns per unit of risk. GlaxoSmithKline PLC ADR is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  3,513  in GlaxoSmithKline PLC ADR on December 30, 2023 and sell it today you would earn a total of  774.00  from holding GlaxoSmithKline PLC ADR or generate 22.03% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Novartis AG ADR  vs.  GlaxoSmithKline PLC ADR

 Performance 
       Timeline  
Novartis AG ADR 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Novartis AG ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Novartis is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.
GlaxoSmithKline PLC ADR 

Risk-Adjusted Performance

18 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in GlaxoSmithKline PLC ADR are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, GlaxoSmithKline PLC disclosed solid returns over the last few months and may actually be approaching a breakup point.

Novartis and GlaxoSmithKline PLC Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Novartis and GlaxoSmithKline PLC

The main advantage of trading using opposite Novartis and GlaxoSmithKline PLC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Novartis position performs unexpectedly, GlaxoSmithKline PLC 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 GlaxoSmithKline PLC will offset losses from the drop in GlaxoSmithKline PLC's long position.
The idea behind Novartis AG ADR and GlaxoSmithKline PLC 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.

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