Correlation Between Novo Nordisk and Vertex Pharmaceuticals

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

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

Diversification Opportunities for Novo Nordisk and Vertex Pharmaceuticals

-0.66

Correlation Coefficient

Novo Nordisk  Vertex Pharmaceuticals

Excellent diversification

The 3 months correlation between Novo and Vertex is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Novo Nordisk AS and Vertex Pharmaceuticals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vertex Pharmaceuticals and Novo Nordisk 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 Novo Nordisk AS are associated (or correlated) with Vertex Pharmaceuticals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vertex Pharmaceuticals has no effect on the direction of Novo Nordisk i.e., Novo Nordisk and Vertex Pharmaceuticals go up and down completely randomly.

Pair Corralation between Novo Nordisk and Vertex Pharmaceuticals

Considering the 90-day investment horizon Novo Nordisk AS is expected to under-perform the Vertex Pharmaceuticals. In addition to that, Novo Nordisk is 1.15 times more volatile than Vertex Pharmaceuticals. It trades about -0.28 of its total potential returns per unit of risk. Vertex Pharmaceuticals is currently generating about -0.23 per unit of volatility. If you would invest  41,211  in Vertex Pharmaceuticals on January 20, 2024 and sell it today you would lose (1,783) from holding Vertex Pharmaceuticals or give up 4.33% of portfolio value over 90 days.

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

Novo Nordisk AS  vs.  Vertex Pharmaceuticals

Novo Nordisk AS

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Novo Nordisk AS are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain basic indicators, Novo Nordisk displayed solid returns over the last few months and may actually be approaching a breakup point.

Vertex Pharmaceuticals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vertex Pharmaceuticals has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Novo Nordisk and Vertex Pharmaceuticals

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

The idea behind Novo Nordisk AS and Vertex 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.

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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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.