Correlation Between Cisco Systems and NETGEAR

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

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

Diversification Opportunities for Cisco Systems and NETGEAR

0.87

Correlation Coefficient

Cisco Systems  NETGEAR

Very poor diversification

The 3 months correlation between Cisco and NETGEAR is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and NETGEAR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NETGEAR and Cisco Systems 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 Cisco Systems are associated (or correlated) with NETGEAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NETGEAR has no effect on the direction of Cisco Systems i.e., Cisco Systems and NETGEAR go up and down completely randomly.

Pair Corralation between Cisco Systems and NETGEAR

Given the investment horizon of 90 days Cisco Systems is expected to generate 2.49 times less return on investment than NETGEAR. But when comparing it to its historical volatility, Cisco Systems is 2.89 times less risky than NETGEAR. It trades about 0.17 of its potential returns per unit of risk. NETGEAR is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,371  in NETGEAR on September 1, 2024 and sell it today you would earn a total of  1,089  from holding NETGEAR or generate 79.43% return on investment over 90 days.

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

Cisco Systems  vs.  NETGEAR

Cisco Systems

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting fundamental indicators, Cisco Systems displayed solid returns over the last few months and may actually be approaching a breakup point.

NETGEAR

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in NETGEAR are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting technical and fundamental indicators, NETGEAR reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cisco Systems and NETGEAR

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

The idea behind Cisco Systems and NETGEAR 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.