Correlation Between US Bancorp and CVS Health

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

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

Diversification Opportunities for US Bancorp and CVS Health

0.5

Correlation Coefficient

US Bancorp  CVS Health

Very weak diversification

The 3 months correlation between USB and CVS is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding US Bancorp and CVS Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health and US Bancorp 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 US Bancorp 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 US Bancorp i.e., US Bancorp and CVS Health go up and down completely randomly.

Pair Corralation between US Bancorp and CVS Health

Assuming the 90 days trading horizon US Bancorp is expected to generate 0.39 times more return on investment than CVS Health. However, US Bancorp is 2.55 times less risky than CVS Health. It trades about -0.23 of its potential returns per unit of risk. CVS Health is currently generating about -0.24 per unit of risk. If you would invest  75,000  in US Bancorp on February 6, 2024 and sell it today you would lose (6,000) from holding US Bancorp or give up 8.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.0%
Values	Daily Returns

US Bancorp  vs.  CVS Health

US Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days US Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, US Bancorp 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 weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with US Bancorp and CVS Health

The main advantage of trading using opposite US Bancorp and CVS Health positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if US Bancorp 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 US Bancorp 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.