Correlation Between Western Digital and Arista Networks

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

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

Diversification Opportunities for Western Digital and Arista Networks

0.69

Correlation Coefficient

Western Digital  Arista Networks

Poor diversification

The 3 months correlation between Western and Arista is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Western Digital and Arista Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arista Networks and Western Digital 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 Western Digital are associated (or correlated) with Arista Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arista Networks has no effect on the direction of Western Digital i.e., Western Digital and Arista Networks go up and down completely randomly.

Pair Corralation between Western Digital and Arista Networks

Assuming the 90 days trading horizon Western Digital is expected to under-perform the Arista Networks. But the stock apears to be less risky and, when comparing its historical volatility, Western Digital is 1.29 times less risky than Arista Networks. The stock trades about -0.13 of its potential returns per unit of risk. The Arista Networks is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  17,280  in Arista Networks on December 30, 2024 and sell it today you would lose (5,780) from holding Arista Networks or give up 33.45% of portfolio value over 90 days.

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

Western Digital  vs.  Arista Networks

Western Digital

Risk-Adjusted Performance

Very Weak

Over the last 90 days Western Digital has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Arista Networks

Risk-Adjusted Performance

Very Weak

Over the last 90 days Arista Networks has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Western Digital and Arista Networks

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

The idea behind Western Digital and Arista Networks 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.