Correlation Between Universal Health and HCA Healthcare

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

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

Diversification Opportunities for Universal Health and HCA Healthcare

0.83

Correlation Coefficient

Universal Health  HCA Healthcare

Very poor diversification

The 3 months correlation between Universal and HCA is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Universal Health Services and HCA Healthcare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HCA Healthcare and Universal 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 Universal Health Services are associated (or correlated) with HCA Healthcare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HCA Healthcare has no effect on the direction of Universal Health i.e., Universal Health and HCA Healthcare go up and down completely randomly.

Pair Corralation between Universal Health and HCA Healthcare

Assuming the 90 days horizon Universal Health Services is expected to generate 1.27 times more return on investment than HCA Healthcare. However, Universal Health is 1.27 times more volatile than HCA Healthcare. It trades about -0.07 of its potential returns per unit of risk. HCA Healthcare is currently generating about -0.12 per unit of risk. If you would invest  20,779  in Universal Health Services on September 13, 2024 and sell it today you would lose (2,579) from holding Universal Health Services or give up 12.41% of portfolio value over 90 days.

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

Universal Health Services  vs.  HCA Healthcare

Universal Health Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Universal Health Services has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

HCA Healthcare

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days HCA Healthcare has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Universal Health and HCA Healthcare

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

The idea behind Universal Health Services and HCA Healthcare 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.