Correlation Between Cadence Design and ServiceNow

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

By analyzing existing cross correlation between Cadence Design Systems and ServiceNow, you can compare the effects of market volatilities on Cadence Design and ServiceNow 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 Cadence Design with a short position of ServiceNow. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cadence Design and ServiceNow.

Diversification Opportunities for Cadence Design and ServiceNow

0.42

Correlation Coefficient

Cadence Design  ServiceNow

Very weak diversification

The 3 months correlation between Cadence and ServiceNow is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Cadence Design Systems and ServiceNow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ServiceNow and Cadence Design 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 Cadence Design Systems are associated (or correlated) with ServiceNow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ServiceNow has no effect on the direction of Cadence Design i.e., Cadence Design and ServiceNow go up and down completely randomly.

Pair Corralation between Cadence Design and ServiceNow

Given the investment horizon of 90 days Cadence Design Systems is expected to under-perform the ServiceNow. But the stock apears to be less risky and, when comparing its historical volatility, Cadence Design Systems is 1.18 times less risky than ServiceNow. The stock trades about -0.37 of its potential returns per unit of risk. The ServiceNow is currently generating about -0.21 of returns per unit of risk over similar time horizon. If you would invest  77,464  in ServiceNow on January 24, 2024 and sell it today you would lose (5,269) from holding ServiceNow or give up 6.8% of portfolio value over 90 days.

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

Cadence Design Systems  vs.  ServiceNow

Cadence Design Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cadence Design Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Cadence Design is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

ServiceNow

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ServiceNow has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, ServiceNow is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Cadence Design and ServiceNow

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

The idea behind Cadence Design Systems and ServiceNow 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.