Correlation Between Encompass Health and CVS Health
Can any of the company-specific risk be diversified away by investing in both Encompass Health 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 Encompass Health and CVS Health into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Encompass Health Corp and CVS Health Corp, you can compare the effects of market volatilities on Encompass Health 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 Encompass Health with a short position of CVS Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Encompass Health and CVS Health.
Diversification Opportunities for Encompass Health and CVS Health
0.72 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Encompass and CVS is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Encompass Health Corp and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp and Encompass Health 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 Encompass Health Corp 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 Corp has no effect on the direction of Encompass Health i.e., Encompass Health and CVS Health go up and down completely randomly.
Pair Corralation between Encompass Health and CVS Health
Considering the 90-day investment horizon Encompass Health is expected to generate 25.84 times less return on investment than CVS Health. But when comparing it to its historical volatility, Encompass Health Corp is 2.77 times less risky than CVS Health. It trades about 0.03 of its potential returns per unit of risk. CVS Health Corp is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest 5,424 in CVS Health Corp on December 8, 2024 and sell it today you would earn a total of 1,209 from holding CVS Health Corp or generate 22.29% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Encompass Health Corp vs. CVS Health Corp
Performance |
| Timeline |
| Encompass Health Corp |
| CVS Health Corp |
Encompass Health and CVS Health Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Encompass Health and CVS Health
The main advantage of trading using opposite Encompass Health and CVS Health positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Encompass Health 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.| Encompass Health vs. Pennant Group | ||
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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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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