Correlation Between 3M and Reata Pharmaceuticals

Can any of the company-specific risk be diversified away by investing in both 3M and Reata Pharmaceuticals 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 3M and Reata Pharmaceuticals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and Reata Pharmaceuticals, you can compare the effects of market volatilities on 3M and Reata Pharmaceuticals 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 3M with a short position of Reata Pharmaceuticals. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and Reata Pharmaceuticals.

Diversification Opportunities for 3M and Reata Pharmaceuticals

0.85

Correlation Coefficient

3M  Reata Pharmaceuticals

Very poor diversification

The 3 months correlation between 3M and Reata is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Reata Pharmaceuticals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reata Pharmaceuticals and 3M 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 3M Company are associated (or correlated) with Reata Pharmaceuticals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reata Pharmaceuticals has no effect on the direction of 3M i.e., 3M and Reata Pharmaceuticals go up and down completely randomly.

Pair Corralation between 3M and Reata Pharmaceuticals

Considering the 90-day investment horizon 3M is expected to generate 8.71 times less return on investment than Reata Pharmaceuticals. But when comparing it to its historical volatility, 3M Company is 3.08 times less risky than Reata Pharmaceuticals. It trades about 0.04 of its potential returns per unit of risk. Reata Pharmaceuticals is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  8,851  in Reata Pharmaceuticals on February 28, 2024 and sell it today you would earn a total of  8,385  from holding Reata Pharmaceuticals or generate 94.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	45.66%
Values	Daily Returns

3M Company  vs.  Reata Pharmaceuticals

3M Company

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain primary indicators, 3M displayed solid returns over the last few months and may actually be approaching a breakup point.

Reata Pharmaceuticals

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with 3M and Reata Pharmaceuticals

The main advantage of trading using opposite 3M and Reata Pharmaceuticals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, Reata Pharmaceuticals 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 Reata Pharmaceuticals will offset losses from the drop in Reata Pharmaceuticals' long position.

The idea behind 3M Company and Reata Pharmaceuticals 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.