Correlation Between Vertex Pharmaceuticals and Cara Therapeutics

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

By analyzing existing cross correlation between Vertex Pharmaceuticals Incorporated and Cara Therapeutics, you can compare the effects of market volatilities on Vertex Pharmaceuticals and Cara Therapeutics 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 Vertex Pharmaceuticals with a short position of Cara Therapeutics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vertex Pharmaceuticals and Cara Therapeutics.

Diversification Opportunities for Vertex Pharmaceuticals and Cara Therapeutics

-0.65

Correlation Coefficient

Vertex Pharmaceuticals  Cara Therapeutics

Excellent diversification

The 3 months correlation between Vertex and Cara is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Vertex Pharmaceuticals Incorpo and Cara Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cara Therapeutics and Vertex Pharmaceuticals 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 Vertex Pharmaceuticals Incorporated are associated (or correlated) with Cara Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cara Therapeutics has no effect on the direction of Vertex Pharmaceuticals i.e., Vertex Pharmaceuticals and Cara Therapeutics go up and down completely randomly.

Pair Corralation between Vertex Pharmaceuticals and Cara Therapeutics

Assuming the 90 days horizon Vertex Pharmaceuticals Incorporated is expected to generate 1.8 times more return on investment than Cara Therapeutics. However, Vertex Pharmaceuticals is 1.8 times more volatile than Cara Therapeutics. It trades about 0.3 of its potential returns per unit of risk. Cara Therapeutics is currently generating about -0.24 per unit of risk. If you would invest  39,250  in Vertex Pharmaceuticals Incorporated on October 25, 2024 and sell it today you would earn a total of  1,770  from holding Vertex Pharmaceuticals Incorporated or generate 4.51% return on investment over 90 days.

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

Vertex Pharmaceuticals Incorpo  vs.  Cara Therapeutics

Vertex Pharmaceuticals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vertex Pharmaceuticals Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Cara Therapeutics

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with Vertex Pharmaceuticals and Cara Therapeutics

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

The idea behind Vertex Pharmaceuticals Incorporated and Cara Therapeutics 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.