Correlation Between United States and Cisco Systems

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

By analyzing existing cross correlation between United States Steel and Cisco Systems, you can compare the effects of market volatilities on United States and Cisco Systems 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 United States with a short position of Cisco Systems. Check out your portfolio center. Please also check ongoing floating volatility patterns of United States and Cisco Systems.

Diversification Opportunities for United States and Cisco Systems

0.25

Correlation Coefficient

United States  Cisco Systems

Modest diversification

The 3 months correlation between United and Cisco is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding United States Steel and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems and United States 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 United States Steel are associated (or correlated) with Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of United States i.e., United States and Cisco Systems go up and down completely randomly.

Pair Corralation between United States and Cisco Systems

Given the investment horizon of 90 days United States Steel is expected to under-perform the Cisco Systems. In addition to that, United States is 2.14 times more volatile than Cisco Systems. It trades about 0.0 of its total potential returns per unit of risk. Cisco Systems is currently generating about 0.18 per unit of volatility. If you would invest  86,582  in Cisco Systems on September 29, 2024 and sell it today you would earn a total of  33,418  from holding Cisco Systems or generate 38.6% return on investment over 90 days.

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

United States Steel  vs.  Cisco Systems

United States Steel

Risk-Adjusted Performance

0 of 100

Very Weak

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

Cisco Systems

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Cisco Systems showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with United States and Cisco Systems

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

The idea behind United States Steel and Cisco Systems 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.