Correlation Between Netcare and Life Healthcare

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

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

Diversification Opportunities for Netcare and Life Healthcare

0.8

Correlation Coefficient

Netcare  Life Healthcare

Very poor diversification

The 3 months correlation between Netcare and Life is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Netcare and Life Healthcare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Life Healthcare and Netcare 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 Netcare are associated (or correlated) with Life Healthcare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Life Healthcare has no effect on the direction of Netcare i.e., Netcare and Life Healthcare go up and down completely randomly.

Pair Corralation between Netcare and Life Healthcare

Assuming the 90 days trading horizon Netcare is expected to generate 2.05 times less return on investment than Life Healthcare. But when comparing it to its historical volatility, Netcare is 1.57 times less risky than Life Healthcare. It trades about 0.14 of its potential returns per unit of risk. Life Healthcare is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  140,000  in Life Healthcare on September 13, 2024 and sell it today you would earn a total of  34,500  from holding Life Healthcare or generate 24.64% return on investment over 90 days.

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

Netcare  vs.  Life Healthcare

Netcare

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Netcare are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Netcare may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Life Healthcare

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Life Healthcare are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Life Healthcare exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Netcare and Life Healthcare

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

The idea behind Netcare and Life Healthcare 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.