Correlation Between Align Technology and Arista Networks

Can any of the company-specific risk be diversified away by investing in both Align Technology and Arista Networks 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 Align Technology and Arista Networks into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Align Technology and Arista Networks

0.4

Correlation Coefficient

Align Technology  Arista Networks

Very weak diversification

The 3 months correlation between Align and Arista is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Align Technology and Arista Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arista Networks and Align Technology 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 Align Technology are associated (or correlated) with Arista Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arista Networks has no effect on the direction of Align Technology i.e., Align Technology and Arista Networks go up and down completely randomly.

Pair Corralation between Align Technology and Arista Networks

Assuming the 90 days trading horizon Align Technology is expected to generate 6.99 times less return on investment than Arista Networks. But when comparing it to its historical volatility, Align Technology is 1.82 times less risky than Arista Networks. It trades about 0.05 of its potential returns per unit of risk. Arista Networks is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  14,018  in Arista Networks on October 25, 2024 and sell it today you would earn a total of  5,233  from holding Arista Networks or generate 37.33% return on investment over 90 days.

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

Align Technology  vs.  Arista Networks

Align Technology

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Align Technology are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong essential indicators, Align Technology is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Arista Networks

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Arista Networks are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Arista Networks sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Align Technology and Arista Networks

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

The idea behind Align Technology and Arista Networks 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.