Correlation Between CVS Health and Melia Hotels

Can any of the company-specific risk be diversified away by investing in both CVS Health and Melia Hotels 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 CVS Health and Melia Hotels into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between CVS Health Corp and Melia Hotels, you can compare the effects of market volatilities on CVS Health and Melia Hotels 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 CVS Health with a short position of Melia Hotels. Check out your portfolio center. Please also check ongoing floating volatility patterns of CVS Health and Melia Hotels.

Diversification Opportunities for CVS Health and Melia Hotels

-0.43

Correlation Coefficient

CVS Health  Melia Hotels

Very good diversification

The 3 months correlation between CVS and Melia is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding CVS Health Corp and Melia Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melia Hotels and CVS Health 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 CVS Health Corp are associated (or correlated) with Melia Hotels. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melia Hotels has no effect on the direction of CVS Health i.e., CVS Health and Melia Hotels go up and down completely randomly.

Pair Corralation between CVS Health and Melia Hotels

Assuming the 90 days trading horizon CVS Health Corp is expected to generate 1.87 times more return on investment than Melia Hotels. However, CVS Health is 1.87 times more volatile than Melia Hotels. It trades about 0.28 of its potential returns per unit of risk. Melia Hotels is currently generating about -0.1 per unit of risk. If you would invest  4,340  in CVS Health Corp on December 22, 2024 and sell it today you would earn a total of  2,452  from holding CVS Health Corp or generate 56.5% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	96.77%
Values	Daily Returns

CVS Health Corp  vs.  Melia Hotels

CVS Health Corp

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health Corp are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, CVS Health unveiled solid returns over the last few months and may actually be approaching a breakup point.

Melia Hotels

Risk-Adjusted Performance

Very Weak

Over the last 90 days Melia Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with CVS Health and Melia Hotels

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

The idea behind CVS Health Corp and Melia Hotels 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.