Can any of the company-specific risk be diversified away by investing in both Stryker and Medtronic 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 Stryker and Medtronic PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Stryker and Medtronic PLC, you can compare the effects of market volatilities on Stryker and Medtronic 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 Stryker with a short position of Medtronic PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stryker and Medtronic PLC.
Diversification Opportunities for Stryker and Medtronic PLC
The 3 months correlation between Stryker and Medtronic is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Stryker and Medtronic PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Medtronic PLC and Stryker 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 Stryker are associated (or correlated) with Medtronic PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Medtronic PLC has no effect on the direction of Stryker i.e., Stryker and Medtronic PLC go up and down completely randomly.
Pair Corralation between Stryker and Medtronic PLC
Assuming the 90 days horizon Stryker is expected to generate 0.87 times more return on investment than Medtronic PLC. However, Stryker is 1.15 times less risky than Medtronic PLC. It trades about 0.17 of its potential returns per unit of risk. Medtronic PLC is currently generating about -0.05 per unit of risk. If you would invest 30,200 in Stryker on March 6, 2024 and sell it today you would earn a total of 1,050 from holding Stryker or generate 3.48% return on investment over 90 days.
Over the last 90 days Stryker has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Stryker is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.
Over the last 90 days Medtronic PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Medtronic PLC is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.