Correlation Between Amazon and Health Care

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

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

Diversification Opportunities for Amazon and Health Care

-0.81

Correlation Coefficient

Amazon  Health Care

Pay attention - limited upside

The 3 months correlation between Amazon and Health is -0.81. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select and Amazon 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 Amazon Inc are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Amazon i.e., Amazon and Health Care go up and down completely randomly.

Pair Corralation between Amazon and Health Care

Given the investment horizon of 90 days Amazon Inc is expected to generate 2.68 times more return on investment than Health Care. However, Amazon is 2.68 times more volatile than Health Care Select. It trades about 0.1 of its potential returns per unit of risk. Health Care Select is currently generating about 0.01 per unit of risk. If you would invest  9,725  in Amazon Inc on October 11, 2024 and sell it today you would earn a total of  12,488  from holding Amazon Inc or generate 128.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	99.6%
Values	Daily Returns

Amazon Inc  vs.  Health Care Select

Pair Trading with Amazon and Health Care

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

The idea behind Amazon Inc and Health Care Select 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.