Correlation Between Johnson Johnson and Cisco Systems

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

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

Diversification Opportunities for Johnson Johnson and Cisco Systems

0.65

Correlation Coefficient

Johnson Johnson  Cisco Systems

Poor diversification

The 3 months correlation between Johnson and Cisco is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Johnson and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems and Johnson Johnson 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 Johnson Johnson 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 Johnson Johnson i.e., Johnson Johnson and Cisco Systems go up and down completely randomly.

Pair Corralation between Johnson Johnson and Cisco Systems

Considering the 90-day investment horizon Johnson Johnson is expected to generate 0.95 times more return on investment than Cisco Systems. However, Johnson Johnson is 1.05 times less risky than Cisco Systems. It trades about 0.21 of its potential returns per unit of risk. Cisco Systems is currently generating about 0.05 per unit of risk. If you would invest  14,220  in Johnson Johnson on December 28, 2024 and sell it today you would earn a total of  2,151  from holding Johnson Johnson or generate 15.13% return on investment over 90 days.

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

Johnson Johnson  vs.  Cisco Systems

Johnson Johnson

Risk-Adjusted Performance

Solid

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

Cisco Systems

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, Cisco Systems is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Johnson Johnson and Cisco Systems

The main advantage of trading using opposite Johnson Johnson and Cisco Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Johnson Johnson 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 Johnson Johnson 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.

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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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.