Correlation Between Eli Lilly and Johnson Johnson

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

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

Diversification Opportunities for Eli Lilly and Johnson Johnson

0.85

Correlation Coefficient

Eli Lilly  Johnson Johnson

Very poor diversification

The 3 months correlation between Eli and Johnson is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Eli Lilly and and Johnson Johnson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson and Eli Lilly 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 Eli Lilly and are associated (or correlated) with Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Eli Lilly i.e., Eli Lilly and Johnson Johnson go up and down completely randomly.

Pair Corralation between Eli Lilly and Johnson Johnson

Considering the 90-day investment horizon Eli Lilly and is expected to under-perform the Johnson Johnson. In addition to that, Eli Lilly is 2.42 times more volatile than Johnson Johnson. It trades about -0.15 of its total potential returns per unit of risk. Johnson Johnson is currently generating about -0.11 per unit of volatility. If you would invest  16,454  in Johnson Johnson on August 30, 2024 and sell it today you would lose (914.00) from holding Johnson Johnson or give up 5.55% of portfolio value over 90 days.

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

Eli Lilly and  vs.  Johnson Johnson

Eli Lilly

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eli Lilly and has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of sluggish performance in the last few months, the Stock's essential indicators remain fairly strong which may send shares a bit higher in December 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Johnson Johnson

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Johnson Johnson has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady basic indicators, Johnson Johnson is not utilizing all of its potentials. The newest stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with Eli Lilly and Johnson Johnson

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

The idea behind Eli Lilly and and Johnson Johnson 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.