Correlation Between Cisco Systems and Reynolds

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

By analyzing existing cross correlation between Cisco Systems and Reynolds American 725, you can compare the effects of market volatilities on Cisco Systems and Reynolds 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 Reynolds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cisco Systems and Reynolds.

Diversification Opportunities for Cisco Systems and Reynolds

-0.25

Correlation Coefficient

Cisco Systems  Reynolds

Very good diversification

The 3 months correlation between Cisco and Reynolds is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and Reynolds American 725 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reynolds American 725 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 Reynolds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reynolds American 725 has no effect on the direction of Cisco Systems i.e., Cisco Systems and Reynolds go up and down completely randomly.

Pair Corralation between Cisco Systems and Reynolds

Given the investment horizon of 90 days Cisco Systems is expected to generate 26.25 times less return on investment than Reynolds. But when comparing it to its historical volatility, Cisco Systems is 40.31 times less risky than Reynolds. It trades about 0.07 of its potential returns per unit of risk. Reynolds American 725 is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  10,526  in Reynolds American 725 on November 19, 2024 and sell it today you would earn a total of  550.00  from holding Reynolds American 725 or generate 5.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	88.91%
Values	Daily Returns

Cisco Systems  vs.  Reynolds American 725

Cisco Systems

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, Cisco Systems displayed solid returns over the last few months and may actually be approaching a breakup point.

Reynolds American 725

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reynolds American 725 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Reynolds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Cisco Systems and Reynolds

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

The idea behind Cisco Systems and Reynolds American 725 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.