Correlation Between Guidewire Software and ServiceNow

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

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

Diversification Opportunities for Guidewire Software and ServiceNow

0.04

Correlation Coefficient

Guidewire Software  ServiceNow

Significant diversification

The 3 months correlation between Guidewire and ServiceNow is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Guidewire Software and ServiceNow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ServiceNow and Guidewire Software 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 Guidewire Software are associated (or correlated) with ServiceNow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ServiceNow has no effect on the direction of Guidewire Software i.e., Guidewire Software and ServiceNow go up and down completely randomly.

Pair Corralation between Guidewire Software and ServiceNow

Given the investment horizon of 90 days Guidewire Software is expected to generate 1.41 times less return on investment than ServiceNow. But when comparing it to its historical volatility, Guidewire Software is 1.07 times less risky than ServiceNow. It trades about 0.1 of its potential returns per unit of risk. ServiceNow is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  78,667  in ServiceNow on September 26, 2024 and sell it today you would earn a total of  31,889  from holding ServiceNow or generate 40.54% return on investment over 90 days.

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

Guidewire Software  vs.  ServiceNow

Guidewire Software

Risk-Adjusted Performance

0 of 100

Very Weak

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

ServiceNow

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in ServiceNow are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, ServiceNow showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Guidewire Software and ServiceNow

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

The idea behind Guidewire Software and ServiceNow 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.