Correlation Between Universal Health and Encompass Health

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

Diversification Opportunities for Universal Health and Encompass Health

0.25

Correlation Coefficient

Universal Health  Encompass Health

Modest diversification

The 3 months correlation between Universal and Encompass is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Universal Health Services and Encompass Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encompass Health Corp 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 Encompass Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encompass Health Corp has no effect on the direction of Universal Health i.e., Universal Health and Encompass Health go up and down completely randomly.

Pair Corralation between Universal Health and Encompass Health

Considering the 90-day investment horizon Universal Health is expected to generate 3.56 times less return on investment than Encompass Health. In addition to that, Universal Health is 1.16 times more volatile than Encompass Health Corp. It trades about 0.04 of its total potential returns per unit of risk. Encompass Health Corp is currently generating about 0.18 per unit of volatility. If you would invest  7,205  in Encompass Health Corp on February 6, 2024 and sell it today you would earn a total of  1,116  from holding Encompass Health Corp or generate 15.49% return on investment over 90 days.

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

Universal Health Services  vs.  Encompass Health Corp

Universal Health Services

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Universal Health Services are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical indicators, Universal Health is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Encompass Health Corp

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encompass Health Corp are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile technical indicators, Encompass Health exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Universal Health and Encompass Health

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

The idea behind Universal Health Services and Encompass Health Corp 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.