Correlation Between Novartis and Bayer AG

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

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

Diversification Opportunities for Novartis and Bayer AG

0.9

Correlation Coefficient

Novartis  Bayer AG

Almost no diversification

The 3 months correlation between Novartis and Bayer is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Novartis AG and Bayer AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bayer AG 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 Bayer AG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bayer AG has no effect on the direction of Novartis i.e., Novartis and Bayer AG go up and down completely randomly.

Pair Corralation between Novartis and Bayer AG

Assuming the 90 days horizon Novartis is expected to generate 1.42 times less return on investment than Bayer AG. In addition to that, Novartis is 1.09 times more volatile than Bayer AG. It trades about 0.1 of its total potential returns per unit of risk. Bayer AG is currently generating about 0.16 per unit of volatility. If you would invest  1,975  in Bayer AG on December 29, 2024 and sell it today you would earn a total of  476.00  from holding Bayer AG or generate 24.1% return on investment over 90 days.

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

Novartis AG  vs.  Bayer AG

Novartis AG

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Novartis AG are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Novartis reported solid returns over the last few months and may actually be approaching a breakup point.

Bayer AG

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bayer AG are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Bayer AG reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Novartis and Bayer AG

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

The idea behind Novartis AG and Bayer AG 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.