Correlation Between Smith Nephew and CochLear

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

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

Diversification Opportunities for Smith Nephew and CochLear

-0.77

Correlation Coefficient

Smith Nephew  CochLear

Pay attention - limited upside

The 3 months correlation between Smith and CochLear is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding Smith Nephew SNATS and CochLear Ltd ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CochLear ADR and Smith Nephew 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 Smith Nephew SNATS are associated (or correlated) with CochLear. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CochLear ADR has no effect on the direction of Smith Nephew i.e., Smith Nephew and CochLear go up and down completely randomly.

Pair Corralation between Smith Nephew and CochLear

Considering the 90-day investment horizon Smith Nephew SNATS is expected to generate 0.71 times more return on investment than CochLear. However, Smith Nephew SNATS is 1.41 times less risky than CochLear. It trades about 0.15 of its potential returns per unit of risk. CochLear Ltd ADR is currently generating about -0.04 per unit of risk. If you would invest  2,418  in Smith Nephew SNATS on December 29, 2024 and sell it today you would earn a total of  377.00  from holding Smith Nephew SNATS or generate 15.59% return on investment over 90 days.

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

Smith Nephew SNATS  vs.  CochLear Ltd ADR

Smith Nephew SNATS

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smith Nephew SNATS are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Smith Nephew displayed solid returns over the last few months and may actually be approaching a breakup point.

CochLear ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days CochLear Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Smith Nephew and CochLear

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

The idea behind Smith Nephew SNATS and CochLear Ltd ADR 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.