Correlation Between Novartis and Bayer AG
Can any of the company-specific risk be diversified away by investing in both Novartis and Bayer AG 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 Novartis and Bayer AG into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Novartis AG ADR and Bayer AG, you can compare the effects of market volatilities on Novartis and Bayer AG 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 Novartis with a short position of Bayer AG. Check out your portfolio center. Please also check ongoing floating volatility patterns of Novartis and Bayer AG.
Diversification Opportunities for Novartis and Bayer AG
Very poor diversification
The 3 months correlation between Novartis and Bayer is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Novartis AG ADR and Bayer AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bayer AG and Novartis 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 Novartis AG ADR are associated (or correlated) with Bayer AG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bayer AG has no effect on the direction of Novartis i.e., Novartis and Bayer AG go up and down completely randomly.
Pair Corralation between Novartis and Bayer AG
Considering the 90-day investment horizon Novartis AG ADR is expected to generate 0.35 times more return on investment than Bayer AG. However, Novartis AG ADR is 2.84 times less risky than Bayer AG. It trades about -0.43 of its potential returns per unit of risk. Bayer AG is currently generating about -0.4 per unit of risk. If you would invest 11,563 in Novartis AG ADR on August 28, 2024 and sell it today you would lose (1,209) from holding Novartis AG ADR or give up 10.46% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Novartis AG ADR vs. Bayer AG
Performance |
| Timeline |
| Novartis AG ADR |
| Bayer AG |
Novartis and Bayer AG Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Novartis and Bayer AG
The main advantage of trading using opposite Novartis and Bayer AG positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Novartis position performs unexpectedly, Bayer AG 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 Bayer AG will offset losses from the drop in Bayer AG's long position.| Novartis vs. AstraZeneca PLC ADR | Novartis vs. GlaxoSmithKline PLC ADR | Novartis vs. Roche Holding Ltd | Novartis vs. Bristol Myers Squibb |
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 Transaction History module to view history of all your transactions and understand their impact on performance.
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