Correlation Between Encompass Health and Select Medical

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

Diversification Opportunities for Encompass Health and Select Medical

0.68

Correlation Coefficient

Encompass Health  Select Medical

Poor diversification

The 3 months correlation between Encompass and Select is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Encompass Health Corp and Select Medical Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Medical 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 Select Medical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Medical Holdings has no effect on the direction of Encompass Health i.e., Encompass Health and Select Medical go up and down completely randomly.

Pair Corralation between Encompass Health and Select Medical

Considering the 90-day investment horizon Encompass Health Corp is expected to generate 0.64 times more return on investment than Select Medical. However, Encompass Health Corp is 1.57 times less risky than Select Medical. It trades about 0.18 of its potential returns per unit of risk. Select Medical Holdings is currently generating about -0.07 per unit of risk. If you would invest  9,579  in Encompass Health Corp on November 19, 2024 and sell it today you would earn a total of  507.00  from holding Encompass Health Corp or generate 5.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

Encompass Health Corp  vs.  Select Medical Holdings

Encompass Health Corp

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Encompass Health Corp are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

Select Medical Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Select Medical Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, Select Medical is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Encompass Health and Select Medical

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

The idea behind Encompass Health Corp and Select Medical 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.