Correlation Between CVS Health and DiamondRock Hospitality

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

By analyzing existing cross correlation between CVS Health and DiamondRock Hospitality, you can compare the effects of market volatilities on CVS Health and DiamondRock Hospitality 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 DiamondRock Hospitality. Check out your portfolio center. Please also check ongoing floating volatility patterns of CVS Health and DiamondRock Hospitality.

Diversification Opportunities for CVS Health and DiamondRock Hospitality

0.3

Correlation Coefficient

CVS Health  DiamondRock Hospitality

Weak diversification

The 3 months correlation between CVS and DiamondRock is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding CVS Health and DiamondRock Hospitality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DiamondRock Hospitality 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 are associated (or correlated) with DiamondRock Hospitality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DiamondRock Hospitality has no effect on the direction of CVS Health i.e., CVS Health and DiamondRock Hospitality go up and down completely randomly.

Pair Corralation between CVS Health and DiamondRock Hospitality

Assuming the 90 days trading horizon CVS Health is expected to generate 1.5 times less return on investment than DiamondRock Hospitality. But when comparing it to its historical volatility, CVS Health is 1.8 times less risky than DiamondRock Hospitality. It trades about 0.07 of its potential returns per unit of risk. DiamondRock Hospitality is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  782.00  in DiamondRock Hospitality on August 30, 2024 and sell it today you would earn a total of  93.00  from holding DiamondRock Hospitality or generate 11.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.46%
Values	Daily Returns

CVS Health  vs.  DiamondRock Hospitality

CVS Health

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, CVS Health may actually be approaching a critical reversion point that can send shares even higher in December 2024.

DiamondRock Hospitality

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in DiamondRock Hospitality are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, DiamondRock Hospitality reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CVS Health and DiamondRock Hospitality

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

The idea behind CVS Health and DiamondRock Hospitality 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.