Correlation Between Palo Alto and Bayer AG

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

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

Diversification Opportunities for Palo Alto and Bayer AG

0.04

Correlation Coefficient

Palo Alto  Bayer AG

Significant diversification

The 3 months correlation between Palo and Bayer is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Palo Alto Networks and Bayer AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bayer AG and Palo Alto 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 Palo Alto Networks 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 Palo Alto i.e., Palo Alto and Bayer AG go up and down completely randomly.

Pair Corralation between Palo Alto and Bayer AG

Given the investment horizon of 90 days Palo Alto Networks is expected to under-perform the Bayer AG. But the stock apears to be less risky and, when comparing its historical volatility, Palo Alto Networks is 1.09 times less risky than Bayer AG. The stock trades about -0.04 of its potential returns per unit of risk. The Bayer AG is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  2,005  in Bayer AG on December 27, 2024 and sell it today you would earn a total of  446.00  from holding Bayer AG or generate 22.24% return on investment over 90 days.

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

Palo Alto Networks  vs.  Bayer AG

Palo Alto Networks

Risk-Adjusted Performance

Weak

Over the last 90 days Palo Alto Networks has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Palo Alto is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Bayer AG

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bayer AG are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Bayer AG reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Palo Alto and Bayer AG

The main advantage of trading using opposite Palo Alto and Bayer AG positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Palo Alto 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 Palo Alto Networks 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.