Correlation Between HCA Holdings and Encompass Health

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

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

Diversification Opportunities for HCA Holdings and Encompass Health

0.75

Correlation Coefficient

HCA Holdings  Encompass Health

Poor diversification

The 3 months correlation between HCA and Encompass is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding HCA Holdings and Encompass Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encompass Health Corp and HCA Holdings 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 HCA Holdings are associated (or correlated) with Encompass Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encompass Health Corp has no effect on the direction of HCA Holdings i.e., HCA Holdings and Encompass Health go up and down completely randomly.

Pair Corralation between HCA Holdings and Encompass Health

Considering the 90-day investment horizon HCA Holdings is expected to generate 1.95 times less return on investment than Encompass Health. In addition to that, HCA Holdings is 1.13 times more volatile than Encompass Health Corp. It trades about 0.04 of its total potential returns per unit of risk. Encompass Health Corp is currently generating about 0.1 per unit of volatility. If you would invest  5,527  in Encompass Health Corp on November 20, 2024 and sell it today you would earn a total of  4,559  from holding Encompass Health Corp or generate 82.49% return on investment over 90 days.

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

HCA Holdings  vs.  Encompass Health Corp

HCA Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days HCA Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

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.

Pair Trading with HCA Holdings and Encompass Health

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

The idea behind HCA Holdings and Encompass 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.

Check out your portfolio center.

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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.