Correlation Between Cisco Systems and Telefonaktiebolaget

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

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

Diversification Opportunities for Cisco Systems and Telefonaktiebolaget

0.69

Correlation Coefficient

Cisco Systems  Telefonaktiebolaget

Poor diversification

The 3 months correlation between Cisco and Telefonaktiebolaget is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and Telefonaktiebolaget LM Ericsso in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telefonaktiebolaget and Cisco Systems 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 Cisco Systems are associated (or correlated) with Telefonaktiebolaget. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telefonaktiebolaget has no effect on the direction of Cisco Systems i.e., Cisco Systems and Telefonaktiebolaget go up and down completely randomly.

Pair Corralation between Cisco Systems and Telefonaktiebolaget

Given the investment horizon of 90 days Cisco Systems is expected to generate 5.81 times less return on investment than Telefonaktiebolaget. But when comparing it to its historical volatility, Cisco Systems is 1.36 times less risky than Telefonaktiebolaget. It trades about 0.02 of its potential returns per unit of risk. Telefonaktiebolaget LM Ericsson is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,482  in Telefonaktiebolaget LM Ericsson on January 25, 2024 and sell it today you would earn a total of  254.00  from holding Telefonaktiebolaget LM Ericsson or generate 4.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.62%
Values	Daily Returns

Cisco Systems  vs.  Telefonaktiebolaget LM Ericsso

Cisco Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cisco Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Telefonaktiebolaget

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Telefonaktiebolaget LM Ericsson has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Telefonaktiebolaget is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Cisco Systems and Telefonaktiebolaget

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

The idea behind Cisco Systems and Telefonaktiebolaget LM Ericsson 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.