Correlation Between Novartis and Nestl SA

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

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

Diversification Opportunities for Novartis and Nestl SA

0.57

Correlation Coefficient

Novartis  Nestl SA

Very weak diversification

The 3 months correlation between Novartis and Nestl is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Novartis AG and Nestl SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nestl SA and Novartis 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 Novartis AG are associated (or correlated) with Nestl SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nestl SA has no effect on the direction of Novartis i.e., Novartis and Nestl SA go up and down completely randomly.

Pair Corralation between Novartis and Nestl SA

Assuming the 90 days trading horizon Novartis is expected to generate 3.25 times less return on investment than Nestl SA. But when comparing it to its historical volatility, Novartis AG is 1.14 times less risky than Nestl SA. It trades about 0.06 of its potential returns per unit of risk. Nestl SA is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  7,648  in Nestl SA on November 29, 2024 and sell it today you would earn a total of  1,112  from holding Nestl SA or generate 14.54% return on investment over 90 days.

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

Novartis AG  vs.  Nestl SA

Novartis AG

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Novartis AG are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Novartis is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Nestl SA

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Nestl SA are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Nestl SA showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Novartis and Nestl SA

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

The idea behind Novartis AG and Nestl SA 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.