Correlation Between Cisco Systems and F5 Networks

Can any of the company-specific risk be diversified away by investing in both Cisco Systems and F5 Networks 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 Cisco Systems and F5 Networks into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cisco Systems and F5 Networks, you can compare the effects of market volatilities on Cisco Systems and F5 Networks 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 Cisco Systems with a short position of F5 Networks. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cisco Systems and F5 Networks.

Diversification Opportunities for Cisco Systems and F5 Networks

0.88

Correlation Coefficient

Cisco Systems  F5 Networks

Very poor diversification

The 3 months correlation between Cisco and FFIV is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and F5 Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on F5 Networks and Cisco Systems 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 Cisco Systems are associated (or correlated) with F5 Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of F5 Networks has no effect on the direction of Cisco Systems i.e., Cisco Systems and F5 Networks go up and down completely randomly.

Pair Corralation between Cisco Systems and F5 Networks

Given the investment horizon of 90 days Cisco Systems is expected to generate 1.33 times less return on investment than F5 Networks. But when comparing it to its historical volatility, Cisco Systems is 1.55 times less risky than F5 Networks. It trades about 0.27 of its potential returns per unit of risk. F5 Networks is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  19,885  in F5 Networks on September 1, 2024 and sell it today you would earn a total of  5,150  from holding F5 Networks or generate 25.9% return on investment over 90 days.

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

Cisco Systems  vs.  F5 Networks

Cisco Systems

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting fundamental indicators, Cisco Systems displayed solid returns over the last few months and may actually be approaching a breakup point.

F5 Networks

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in F5 Networks are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating forward indicators, F5 Networks showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cisco Systems and F5 Networks

The main advantage of trading using opposite Cisco Systems and F5 Networks positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cisco Systems position performs unexpectedly, F5 Networks 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 F5 Networks will offset losses from the drop in F5 Networks' long position.

The idea behind Cisco Systems and F5 Networks 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.