Correlation Between Encompass Health and HCA Holdings

Can any of the company-specific risk be diversified away by investing in both Encompass Health and HCA Holdings 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 HCA Holdings 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 HCA Holdings, you can compare the effects of market volatilities on Encompass Health and HCA Holdings 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 HCA Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Encompass Health and HCA Holdings.

Diversification Opportunities for Encompass Health and HCA Holdings

0.73

Correlation Coefficient

Encompass Health  HCA Holdings

Poor diversification

The 3 months correlation between Encompass and HCA is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Encompass Health Corp and HCA Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HCA Holdings 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 HCA Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HCA Holdings has no effect on the direction of Encompass Health i.e., Encompass Health and HCA Holdings go up and down completely randomly.

Pair Corralation between Encompass Health and HCA Holdings

Considering the 90-day investment horizon Encompass Health Corp is expected to under-perform the HCA Holdings. But the stock apears to be less risky and, when comparing its historical volatility, Encompass Health Corp is 1.45 times less risky than HCA Holdings. The stock trades about -0.02 of its potential returns per unit of risk. The HCA Holdings is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  32,653  in HCA Holdings on November 29, 2024 and sell it today you would earn a total of  654.00  from holding HCA Holdings or generate 2.0% return on investment over 90 days.

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

Encompass Health Corp  vs.  HCA Holdings

Encompass Health Corp

Risk-Adjusted Performance

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.

HCA Holdings

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in HCA Holdings are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental indicators, HCA Holdings is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Encompass Health and HCA Holdings

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

The idea behind Encompass Health Corp and HCA Holdings 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.