Correlation Between Incyte and United Therapeutics

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

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

Diversification Opportunities for Incyte and United Therapeutics

0.86

Correlation Coefficient

Incyte  United Therapeutics

Very poor diversification

The 3 months correlation between Incyte and United is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Incyte and United Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Therapeutics and Incyte 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 Incyte are associated (or correlated) with United Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Therapeutics has no effect on the direction of Incyte i.e., Incyte and United Therapeutics go up and down completely randomly.

Pair Corralation between Incyte and United Therapeutics

Given the investment horizon of 90 days Incyte is expected to generate 1.8 times less return on investment than United Therapeutics. In addition to that, Incyte is 1.22 times more volatile than United Therapeutics. It trades about 0.05 of its total potential returns per unit of risk. United Therapeutics is currently generating about 0.11 per unit of volatility. If you would invest  36,140  in United Therapeutics on August 31, 2024 and sell it today you would earn a total of  1,673  from holding United Therapeutics or generate 4.63% return on investment over 90 days.

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

Incyte  vs.  United Therapeutics

Incyte

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Incyte are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, Incyte showed solid returns over the last few months and may actually be approaching a breakup point.

United Therapeutics

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in United Therapeutics are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical indicators, United Therapeutics may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Incyte and United Therapeutics

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

The idea behind Incyte and United Therapeutics 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.