Correlation Between Vertex Pharmaceuticals and ARCA Biopharma

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

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

Diversification Opportunities for Vertex Pharmaceuticals and ARCA Biopharma

-0.76

Correlation Coefficient

Vertex Pharmaceuticals  ARCA Biopharma

Pay attention - limited upside

The 3 months correlation between Vertex and ARCA is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Vertex Pharmaceuticals and ARCA Biopharma in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Biopharma and Vertex Pharmaceuticals 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 Vertex Pharmaceuticals are associated (or correlated) with ARCA Biopharma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Biopharma has no effect on the direction of Vertex Pharmaceuticals i.e., Vertex Pharmaceuticals and ARCA Biopharma go up and down completely randomly.

Pair Corralation between Vertex Pharmaceuticals and ARCA Biopharma

Given the investment horizon of 90 days Vertex Pharmaceuticals is expected to under-perform the ARCA Biopharma. But the stock apears to be less risky and, when comparing its historical volatility, Vertex Pharmaceuticals is 20.55 times less risky than ARCA Biopharma. The stock trades about -0.21 of its potential returns per unit of risk. The ARCA Biopharma is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  171.00  in ARCA Biopharma on January 26, 2024 and sell it today you would earn a total of  192.00  from holding ARCA Biopharma or generate 112.28% return on investment over 90 days.

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

Vertex Pharmaceuticals  vs.  ARCA Biopharma

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.

ARCA Biopharma

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ARCA Biopharma are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady forward indicators, ARCA Biopharma displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vertex Pharmaceuticals and ARCA Biopharma

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

The idea behind Vertex Pharmaceuticals and ARCA Biopharma 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.