Correlation Between Western Digital and CVS Health

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

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

Diversification Opportunities for Western Digital and CVS Health

0.39

Correlation Coefficient

Western Digital  CVS Health

Weak diversification

The 3 months correlation between Western and CVS is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Western Digital and CVS Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health 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 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 has no effect on the direction of Western Digital i.e., Western Digital and CVS Health go up and down completely randomly.

Pair Corralation between Western Digital and CVS Health

Assuming the 90 days trading horizon Western Digital is expected to generate 2.12 times less return on investment than CVS Health. In addition to that, Western Digital is 1.36 times more volatile than CVS Health. It trades about 0.16 of its total potential returns per unit of risk. CVS Health is currently generating about 0.47 per unit of volatility. If you would invest  89,912  in CVS Health on October 27, 2024 and sell it today you would earn a total of  20,288  from holding CVS Health or generate 22.56% return on investment over 90 days.

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

Western Digital  vs.  CVS Health

Western Digital

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Western Digital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, Western Digital is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

CVS Health

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CVS Health has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, CVS Health is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Western Digital and CVS Health

The main advantage of trading using opposite Western Digital and CVS Health positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Digital 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 Western Digital and CVS Health 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 Anywhere module to track or share privately all of your investments from the convenience of any device.