Correlation Between Vertex Pharmaceuticals and WuXi Biologics

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

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

Diversification Opportunities for Vertex Pharmaceuticals and WuXi Biologics

0.74

Correlation Coefficient

Vertex Pharmaceuticals  WuXi Biologics

Poor diversification

The 3 months correlation between Vertex and WuXi is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Vertex Pharmaceuticals and WuXi Biologics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WuXi Biologics 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 WuXi Biologics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WuXi Biologics has no effect on the direction of Vertex Pharmaceuticals i.e., Vertex Pharmaceuticals and WuXi Biologics go up and down completely randomly.

Pair Corralation between Vertex Pharmaceuticals and WuXi Biologics

Given the investment horizon of 90 days Vertex Pharmaceuticals is expected to generate 0.2 times more return on investment than WuXi Biologics. However, Vertex Pharmaceuticals is 5.02 times less risky than WuXi Biologics. It trades about -0.09 of its potential returns per unit of risk. WuXi Biologics is currently generating about -0.17 per unit of risk. If you would invest  42,756  in Vertex Pharmaceuticals on January 24, 2024 and sell it today you would lose (2,764) from holding Vertex Pharmaceuticals or give up 6.46% of portfolio value over 90 days.

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

Vertex Pharmaceuticals  vs.  WuXi Biologics

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.

WuXi Biologics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days WuXi Biologics has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's fundamental drivers remain nearly stable which may send shares a bit higher in May 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Vertex Pharmaceuticals and WuXi Biologics

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

The idea behind Vertex Pharmaceuticals and WuXi Biologics 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.