Correlation Between Verona Pharma and Verastem

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

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

Diversification Opportunities for Verona Pharma and Verastem

0.86

Correlation Coefficient

Verona Pharma  Verastem

Very poor diversification

The 3 months correlation between Verona and Verastem is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Verona Pharma PLC and Verastem in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verastem and Verona 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 Verona Pharma PLC are associated (or correlated) with Verastem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verastem has no effect on the direction of Verona Pharma i.e., Verona Pharma and Verastem go up and down completely randomly.

Pair Corralation between Verona Pharma and Verastem

Given the investment horizon of 90 days Verona Pharma is expected to generate 1.58 times less return on investment than Verastem. But when comparing it to its historical volatility, Verona Pharma PLC is 1.97 times less risky than Verastem. It trades about 0.14 of its potential returns per unit of risk. Verastem is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  357.00  in Verastem on September 21, 2024 and sell it today you would earn a total of  87.00  from holding Verastem or generate 24.37% return on investment over 90 days.

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

Verona Pharma PLC  vs.  Verastem

Verona Pharma PLC

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Verona Pharma PLC are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Verona Pharma sustained solid returns over the last few months and may actually be approaching a breakup point.

Verastem

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Verastem are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Verastem displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Verona Pharma and Verastem

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

The idea behind Verona Pharma PLC and Verastem 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.