Correlation Between West Pharmaceutical and Electromed

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

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

Diversification Opportunities for West Pharmaceutical and Electromed

0.5

Correlation Coefficient

West Pharmaceutical  Electromed

Very weak diversification

The 3 months correlation between West and Electromed is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding West Pharmaceutical Services and Electromed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electromed and West Pharmaceutical 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 West Pharmaceutical Services are associated (or correlated) with Electromed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electromed has no effect on the direction of West Pharmaceutical i.e., West Pharmaceutical and Electromed go up and down completely randomly.

Pair Corralation between West Pharmaceutical and Electromed

Considering the 90-day investment horizon West Pharmaceutical is expected to generate 110.14 times less return on investment than Electromed. But when comparing it to its historical volatility, West Pharmaceutical Services is 1.4 times less risky than Electromed. It trades about 0.0 of its potential returns per unit of risk. Electromed is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,078  in Electromed on September 4, 2024 and sell it today you would earn a total of  1,933  from holding Electromed or generate 179.31% return on investment over 90 days.

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

West Pharmaceutical Services  vs.  Electromed

West Pharmaceutical

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in West Pharmaceutical Services are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, West Pharmaceutical may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Electromed

Risk-Adjusted Performance

26 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Electromed are ranked lower than 26 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, Electromed exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with West Pharmaceutical and Electromed

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

The idea behind West Pharmaceutical Services and Electromed 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.