Correlation Between Alphabet and Smith Nephew

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

By analyzing existing cross correlation between Alphabet Inc Class C and Smith Nephew plc, you can compare the effects of market volatilities on Alphabet and Smith Nephew 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 Alphabet with a short position of Smith Nephew. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alphabet and Smith Nephew.

Diversification Opportunities for Alphabet and Smith Nephew

-0.61

Correlation Coefficient

Alphabet  Smith Nephew

Excellent diversification

The 3 months correlation between Alphabet and Smith is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Alphabet Inc Class C and Smith Nephew plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Nephew plc and Alphabet 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 Alphabet Inc Class C are associated (or correlated) with Smith Nephew. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Nephew plc has no effect on the direction of Alphabet i.e., Alphabet and Smith Nephew go up and down completely randomly.

Pair Corralation between Alphabet and Smith Nephew

Given the investment horizon of 90 days Alphabet Inc Class C is expected to under-perform the Smith Nephew. But the stock apears to be less risky and, when comparing its historical volatility, Alphabet Inc Class C is 1.56 times less risky than Smith Nephew. The stock trades about -0.01 of its potential returns per unit of risk. The Smith Nephew plc is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,290  in Smith Nephew plc on December 3, 2024 and sell it today you would earn a total of  170.00  from holding Smith Nephew plc or generate 13.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	73.77%
Values	Daily Returns

Alphabet Inc Class C  vs.  Smith Nephew plc

Alphabet Class C

Risk-Adjusted Performance

Very Weak

Over the last 90 days Alphabet Inc Class C has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Alphabet is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Smith Nephew plc

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smith Nephew plc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Smith Nephew reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Alphabet and Smith Nephew

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

The idea behind Alphabet Inc Class C and Smith Nephew plc 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.