Correlation Between West Pharmaceutical and Medtronic PLC

Can any of the company-specific risk be diversified away by investing in both West Pharmaceutical and Medtronic PLC 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 Medtronic PLC 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 Medtronic PLC, you can compare the effects of market volatilities on West Pharmaceutical and Medtronic PLC 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 Medtronic PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of West Pharmaceutical and Medtronic PLC.

Diversification Opportunities for West Pharmaceutical and Medtronic PLC

-0.41

Correlation Coefficient

West Pharmaceutical  Medtronic PLC

Very good diversification

The 3 months correlation between West and Medtronic is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding West Pharmaceutical Services and Medtronic PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Medtronic PLC 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 Medtronic PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Medtronic PLC has no effect on the direction of West Pharmaceutical i.e., West Pharmaceutical and Medtronic PLC go up and down completely randomly.

Pair Corralation between West Pharmaceutical and Medtronic PLC

Considering the 90-day investment horizon West Pharmaceutical Services is expected to generate 2.82 times more return on investment than Medtronic PLC. However, West Pharmaceutical is 2.82 times more volatile than Medtronic PLC. It trades about 0.05 of its potential returns per unit of risk. Medtronic PLC is currently generating about -0.05 per unit of risk. If you would invest  30,011  in West Pharmaceutical Services on September 5, 2024 and sell it today you would earn a total of  2,178  from holding West Pharmaceutical Services or generate 7.26% return on investment over 90 days.

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

West Pharmaceutical Services  vs.  Medtronic PLC

West Pharmaceutical

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in West Pharmaceutical Services are ranked lower than 4 (%) 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.

Medtronic PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Medtronic PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, Medtronic PLC is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with West Pharmaceutical and Medtronic PLC

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

The idea behind West Pharmaceutical Services and Medtronic 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.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.