Can any of the company-specific risk be diversified away by investing in both ResMed and CVS Health 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 ResMed and CVS Health into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ResMed Inc and CVS Health Corp, you can compare the effects of market volatilities on ResMed and CVS Health 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 ResMed with a short position of CVS Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of ResMed and CVS Health.
Diversification Opportunities for ResMed and CVS Health
The 3 months correlation between ResMed and CVS is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding ResMed Inc and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp and ResMed 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 ResMed Inc are associated (or correlated) with CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health Corp has no effect on the direction of ResMed i.e., ResMed and CVS Health go up and down completely randomly.
Considering the 90-day investment horizon ResMed Inc is expected to generate 1.07 times more return on investment than CVS Health. However, ResMed is 1.07 times more volatile than CVS Health Corp. It trades about 0.1 of its potential returns per unit of risk. CVS Health Corp is currently generating about -0.1 per unit of risk. If you would invest 17,724 in ResMed Inc on March 5, 2024 and sell it today you would earn a total of 3,015 from holding ResMed Inc or generate 17.01% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in ResMed Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, ResMed exhibited solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days CVS Health Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in July 2024. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.