Correlation Between Johnson Johnson and Novartis

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

By analyzing existing cross correlation between Johnson Johnson and Novartis AG ADR, you can compare the effects of market volatilities on Johnson Johnson and Novartis 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 Novartis. Check out your portfolio center. Please also check ongoing floating volatility patterns of Johnson Johnson and Novartis.

Diversification Opportunities for Johnson Johnson and Novartis

0.94

Correlation Coefficient

Johnson Johnson  Novartis

Almost no diversification

The 3 months correlation between Johnson and Novartis is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Johnson and Novartis AG ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Novartis AG ADR 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 Novartis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Novartis AG ADR has no effect on the direction of Johnson Johnson i.e., Johnson Johnson and Novartis go up and down completely randomly.

Pair Corralation between Johnson Johnson and Novartis

Considering the 90-day investment horizon Johnson Johnson is expected to generate 1.25 times less return on investment than Novartis. But when comparing it to its historical volatility, Johnson Johnson is 1.19 times less risky than Novartis. It trades about 0.21 of its potential returns per unit of risk. Novartis AG ADR is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  9,395  in Novartis AG ADR on December 29, 2024 and sell it today you would earn a total of  1,745  from holding Novartis AG ADR or generate 18.57% return on investment over 90 days.

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

Johnson Johnson  vs.  Novartis AG ADR

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.

Novartis AG ADR

Risk-Adjusted Performance

Solid

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

Pair Trading with Johnson Johnson and Novartis

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

The idea behind Johnson Johnson and Novartis AG ADR 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.