Correlation Between Toronto Dominion and CVS HEALTH

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

By analyzing existing cross correlation between Toronto Dominion Bank and CVS HEALTH CDR, you can compare the effects of market volatilities on Toronto Dominion and CVS HEALTH 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 Toronto Dominion with a short position of CVS HEALTH. Check out your portfolio center. Please also check ongoing floating volatility patterns of Toronto Dominion and CVS HEALTH.

Diversification Opportunities for Toronto Dominion and CVS HEALTH

0.64

Correlation Coefficient

Toronto Dominion  CVS HEALTH

Poor diversification

The 3 months correlation between Toronto and CVS is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Toronto Dominion Bank and CVS HEALTH CDR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS HEALTH CDR and Toronto Dominion 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 Toronto Dominion Bank are associated (or correlated) with CVS HEALTH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS HEALTH CDR has no effect on the direction of Toronto Dominion i.e., Toronto Dominion and CVS HEALTH go up and down completely randomly.

Pair Corralation between Toronto Dominion and CVS HEALTH

Assuming the 90 days horizon Toronto Dominion Bank is expected to generate 0.68 times more return on investment than CVS HEALTH. However, Toronto Dominion Bank is 1.46 times less risky than CVS HEALTH. It trades about -0.05 of its potential returns per unit of risk. CVS HEALTH CDR is currently generating about -0.55 per unit of risk. If you would invest  7,781  in Toronto Dominion Bank on September 26, 2024 and sell it today you would lose (159.00) from holding Toronto Dominion Bank or give up 2.04% of portfolio value over 90 days.

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

Toronto Dominion Bank  vs.  CVS HEALTH CDR

Toronto Dominion Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toronto Dominion Bank 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 healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

CVS HEALTH CDR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CVS HEALTH CDR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Toronto Dominion and CVS HEALTH

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

The idea behind Toronto Dominion Bank and CVS HEALTH CDR 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.