Correlation Between CVS Health and WATSCO INC

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

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

Diversification Opportunities for CVS Health and WATSCO INC

0.74

Correlation Coefficient

CVS Health  WATSCO INC

Poor diversification

The 3 months correlation between CVS and WATSCO is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding CVS Health and WATSCO INC B in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WATSCO INC B 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 WATSCO INC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WATSCO INC B has no effect on the direction of CVS Health i.e., CVS Health and WATSCO INC go up and down completely randomly.

Pair Corralation between CVS Health and WATSCO INC

Assuming the 90 days trading horizon CVS Health is expected to generate 1.04 times more return on investment than WATSCO INC. However, CVS Health is 1.04 times more volatile than WATSCO INC B. It trades about 0.24 of its potential returns per unit of risk. WATSCO INC B is currently generating about 0.08 per unit of risk. If you would invest  4,223  in CVS Health on December 29, 2024 and sell it today you would earn a total of  1,953  from holding CVS Health or generate 46.25% return on investment over 90 days.

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

CVS Health  vs.  WATSCO INC B

CVS Health

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, CVS Health exhibited solid returns over the last few months and may actually be approaching a breakup point.

WATSCO INC B

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in WATSCO INC B are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, WATSCO INC reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CVS Health and WATSCO INC

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

The idea behind CVS Health and WATSCO INC B 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.