Can any of the company-specific risk be diversified away by investing in both Equillium and Johnson Johnson 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 Equillium and Johnson Johnson into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equillium and Johnson Johnson, you can compare the effects of market volatilities on Equillium and Johnson Johnson 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 Equillium with a short position of Johnson Johnson. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equillium and Johnson Johnson.
Diversification Opportunities for Equillium and Johnson Johnson
The 3 months correlation between Equillium and Johnson is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Equillium and Johnson Johnson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson and Equillium 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 Equillium are associated (or correlated) with Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Equillium i.e., Equillium and Johnson Johnson go up and down completely randomly.
Pair Corralation between Equillium and Johnson Johnson
Allowing for the 90-day total investment horizon Equillium is expected to under-perform the Johnson Johnson. In addition to that, Equillium is 4.2 times more volatile than Johnson Johnson. It trades about -0.11 of its total potential returns per unit of risk. Johnson Johnson is currently generating about 0.02 per unit of volatility. If you would invest 15,392 in Johnson Johnson on September 2, 2023 and sell it today you would earn a total of 74.00 from holding Johnson Johnson or generate 0.48% return on investment over 90 days.
Over the last 90 days Equillium has generated negative risk-adjusted returns adding no value to investors with long positions. Even with uncertain performance in the last few months, the Stock's basic indicators remain relatively invariable which may send shares a bit higher in January 2024. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.
Over the last 90 days Johnson Johnson has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady basic indicators, Johnson Johnson is not utilizing all of its potentials. The newest stock price chaos, may contribute to medium-term losses for the stakeholders.
The main advantage of trading using opposite Equillium and Johnson Johnson positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equillium position performs unexpectedly, Johnson Johnson 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 Johnson Johnson will offset losses from the drop in Johnson Johnson's long position.
The idea behind Equillium and Johnson Johnson 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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