Correlation Between Encompass Health and Addus HomeCare

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

By analyzing existing cross correlation between Encompass Health Corp and Addus HomeCare, you can compare the effects of market volatilities on Encompass Health and Addus HomeCare 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 Encompass Health with a short position of Addus HomeCare. Check out your portfolio center. Please also check ongoing floating volatility patterns of Encompass Health and Addus HomeCare.

Diversification Opportunities for Encompass Health and Addus HomeCare

0.62

Correlation Coefficient

Encompass Health  Addus HomeCare

Poor diversification

The 3 months correlation between Encompass and Addus is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Encompass Health Corp and Addus HomeCare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Addus HomeCare and Encompass Health 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 Encompass Health Corp are associated (or correlated) with Addus HomeCare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Addus HomeCare has no effect on the direction of Encompass Health i.e., Encompass Health and Addus HomeCare go up and down completely randomly.

Pair Corralation between Encompass Health and Addus HomeCare

Considering the 90-day investment horizon Encompass Health Corp is expected to generate 0.7 times more return on investment than Addus HomeCare. However, Encompass Health Corp is 1.43 times less risky than Addus HomeCare. It trades about 0.07 of its potential returns per unit of risk. Addus HomeCare is currently generating about 0.04 per unit of risk. If you would invest  5,092  in Encompass Health Corp on February 17, 2024 and sell it today you would earn a total of  3,452  from holding Encompass Health Corp or generate 67.79% return on investment over 90 days.

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

Encompass Health Corp  vs.  Addus HomeCare

Encompass Health Corp

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encompass Health Corp are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile technical indicators, Encompass Health exhibited solid returns over the last few months and may actually be approaching a breakup point.

Addus HomeCare

Risk-Adjusted Performance

12 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Addus HomeCare are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Addus HomeCare unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Encompass Health and Addus HomeCare

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

The idea behind Encompass Health Corp and Addus HomeCare 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.

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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.