Correlation Between Cisco Systems and NetApp

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

By analyzing existing cross correlation between Cisco Systems and NetApp Inc, you can compare the effects of market volatilities on Cisco Systems and NetApp 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 NetApp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cisco Systems and NetApp.

Diversification Opportunities for Cisco Systems and NetApp

-0.21

Correlation Coefficient

Cisco Systems  NetApp

Very good diversification

The 3 months correlation between Cisco and NetApp is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and NetApp Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NetApp Inc 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 NetApp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NetApp Inc has no effect on the direction of Cisco Systems i.e., Cisco Systems and NetApp go up and down completely randomly.

Pair Corralation between Cisco Systems and NetApp

Given the investment horizon of 90 days Cisco Systems is expected to generate 4.61 times less return on investment than NetApp. But when comparing it to its historical volatility, Cisco Systems is 1.31 times less risky than NetApp. It trades about 0.01 of its potential returns per unit of risk. NetApp Inc is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  6,907  in NetApp Inc on January 26, 2024 and sell it today you would earn a total of  3,099  from holding NetApp Inc or generate 44.87% return on investment over 90 days.

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

Cisco Systems  vs.  NetApp Inc

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 abnormal 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.

NetApp Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NetApp Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting basic indicators, NetApp reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cisco Systems and NetApp

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

The idea behind Cisco Systems and NetApp Inc 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.

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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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.