Correlation Between Encompass Health and CVS Health

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

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

Diversification Opportunities for Encompass Health and CVS Health

0.59

Correlation Coefficient

Encompass Health  CVS Health

Very weak diversification

The 3 months correlation between Encompass and CVS is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Encompass Health Corp and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp and Encompass 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 Encompass Health Corp are associated (or correlated) with CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health Corp has no effect on the direction of Encompass Health i.e., Encompass Health and CVS Health go up and down completely randomly.

Pair Corralation between Encompass Health and CVS Health

Considering the 90-day investment horizon Encompass Health Corp is expected to generate 0.69 times more return on investment than CVS Health. However, Encompass Health Corp is 1.46 times less risky than CVS Health. It trades about 0.07 of its potential returns per unit of risk. CVS Health Corp is currently generating about -0.03 per unit of risk. If you would invest  6,216  in Encompass Health Corp on October 23, 2024 and sell it today you would earn a total of  3,258  from holding Encompass Health Corp or generate 52.41% return on investment over 90 days.

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

Encompass Health Corp  vs.  CVS Health Corp

Encompass Health Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Encompass Health Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, Encompass Health is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

CVS Health Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CVS Health Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, CVS Health is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Encompass Health and CVS Health

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

The idea behind Encompass Health Corp and CVS Health Corp 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.