Correlation Between ESSA Pharma and Avadel Pharmaceuticals

Can any of the company-specific risk be diversified away by investing in both ESSA Pharma and Avadel Pharmaceuticals 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 ESSA Pharma and Avadel Pharmaceuticals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ESSA Pharma and Avadel Pharmaceuticals PLC, you can compare the effects of market volatilities on ESSA Pharma and Avadel Pharmaceuticals 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 ESSA Pharma with a short position of Avadel Pharmaceuticals. Check out your portfolio center. Please also check ongoing floating volatility patterns of ESSA Pharma and Avadel Pharmaceuticals.

Diversification Opportunities for ESSA Pharma and Avadel Pharmaceuticals

0.42

Correlation Coefficient

ESSA Pharma  Avadel Pharmaceuticals

Very weak diversification

The 3 months correlation between ESSA and Avadel is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding ESSA Pharma and Avadel Pharmaceuticals PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Avadel Pharmaceuticals and ESSA Pharma 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 ESSA Pharma are associated (or correlated) with Avadel Pharmaceuticals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Avadel Pharmaceuticals has no effect on the direction of ESSA Pharma i.e., ESSA Pharma and Avadel Pharmaceuticals go up and down completely randomly.

Pair Corralation between ESSA Pharma and Avadel Pharmaceuticals

Given the investment horizon of 90 days ESSA Pharma is expected to under-perform the Avadel Pharmaceuticals. But the stock apears to be less risky and, when comparing its historical volatility, ESSA Pharma is 3.54 times less risky than Avadel Pharmaceuticals. The stock trades about -0.56 of its potential returns per unit of risk. The Avadel Pharmaceuticals PLC is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  1,166  in Avadel Pharmaceuticals PLC on September 23, 2024 and sell it today you would lose (135.00) from holding Avadel Pharmaceuticals PLC or give up 11.58% of portfolio value over 90 days.

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

ESSA Pharma  vs.  Avadel Pharmaceuticals PLC

ESSA Pharma

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ESSA Pharma has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's forward indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Avadel Pharmaceuticals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Avadel Pharmaceuticals PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unsteady performance in the last few months, the Stock's fundamental indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with ESSA Pharma and Avadel Pharmaceuticals

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

The idea behind ESSA Pharma and Avadel Pharmaceuticals PLC 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.