Correlation Between Honeywell International and Cisco Systems

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

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

Diversification Opportunities for Honeywell International and Cisco Systems

0.93

Correlation Coefficient

Honeywell International  Cisco Systems

Almost no diversification

The 3 months correlation between Honeywell and Cisco is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Honeywell International and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems and Honeywell International 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 Honeywell International are associated (or correlated) with Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of Honeywell International i.e., Honeywell International and Cisco Systems go up and down completely randomly.

Pair Corralation between Honeywell International and Cisco Systems

Assuming the 90 days trading horizon Honeywell International is expected to generate 0.76 times more return on investment than Cisco Systems. However, Honeywell International is 1.32 times less risky than Cisco Systems. It trades about -0.11 of its potential returns per unit of risk. Cisco Systems is currently generating about -0.12 per unit of risk. If you would invest  467,900  in Honeywell International on September 24, 2024 and sell it today you would lose (9,551) from holding Honeywell International or give up 2.04% of portfolio value over 90 days.

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

Honeywell International  vs.  Cisco Systems

Honeywell International

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Honeywell International are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Honeywell International showed solid returns over the last few months and may actually be approaching a breakup point.

Cisco Systems

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Cisco Systems showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Honeywell International and Cisco Systems

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

The idea behind Honeywell International and Cisco Systems 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.