Correlation Between Koninklijke Philips and Smith Nephew

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

By analyzing existing cross correlation between Koninklijke Philips NV and Smith Nephew plc, you can compare the effects of market volatilities on Koninklijke Philips and Smith Nephew 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 Koninklijke Philips with a short position of Smith Nephew. Check out your portfolio center. Please also check ongoing floating volatility patterns of Koninklijke Philips and Smith Nephew.

Diversification Opportunities for Koninklijke Philips and Smith Nephew

-0.22

Correlation Coefficient

Koninklijke Philips  Smith Nephew

Very good diversification

The 3 months correlation between Koninklijke and Smith is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Koninklijke Philips NV and Smith Nephew plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Nephew plc and Koninklijke Philips 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 Koninklijke Philips NV are associated (or correlated) with Smith Nephew. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Nephew plc has no effect on the direction of Koninklijke Philips i.e., Koninklijke Philips and Smith Nephew go up and down completely randomly.

Pair Corralation between Koninklijke Philips and Smith Nephew

Considering the 90-day investment horizon Koninklijke Philips is expected to generate 24.1 times less return on investment than Smith Nephew. But when comparing it to its historical volatility, Koninklijke Philips NV is 1.6 times less risky than Smith Nephew. It trades about 0.01 of its potential returns per unit of risk. Smith Nephew plc is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,290  in Smith Nephew plc on December 3, 2024 and sell it today you would earn a total of  170.00  from holding Smith Nephew plc or generate 13.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	73.77%
Values	Daily Returns

Koninklijke Philips NV  vs.  Smith Nephew plc

Koninklijke Philips

Risk-Adjusted Performance

Very Weak

Over the last 90 days Koninklijke Philips NV has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical indicators, Koninklijke Philips is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Smith Nephew plc

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smith Nephew plc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Smith Nephew reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Koninklijke Philips and Smith Nephew

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

The idea behind Koninklijke Philips NV and Smith Nephew plc 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.