Correlation Between Africa Oil and Diamondback Energy

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

By analyzing existing cross correlation between Africa Oil Corp and Diamondback Energy, you can compare the effects of market volatilities on Africa Oil and Diamondback Energy 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 Africa Oil with a short position of Diamondback Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Africa Oil and Diamondback Energy.

Diversification Opportunities for Africa Oil and Diamondback Energy

0.24

Correlation Coefficient

Africa Oil  Diamondback Energy

Modest diversification

The 3 months correlation between Africa and Diamondback is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Africa Oil Corp and Diamondback Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamondback Energy and Africa Oil 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 Africa Oil Corp are associated (or correlated) with Diamondback Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamondback Energy has no effect on the direction of Africa Oil i.e., Africa Oil and Diamondback Energy go up and down completely randomly.

Pair Corralation between Africa Oil and Diamondback Energy

Assuming the 90 days horizon Africa Oil Corp is expected to generate 1.32 times more return on investment than Diamondback Energy. However, Africa Oil is 1.32 times more volatile than Diamondback Energy. It trades about -0.22 of its potential returns per unit of risk. Diamondback Energy is currently generating about -0.46 per unit of risk. If you would invest  141.00  in Africa Oil Corp on September 24, 2024 and sell it today you would lose (12.00) from holding Africa Oil Corp or give up 8.51% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Africa Oil Corp  vs.  Diamondback Energy

Africa Oil Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Africa Oil Corp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, Africa Oil is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Diamondback Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diamondback Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite conflicting 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 Africa Oil and Diamondback Energy

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

The idea behind Africa Oil Corp and Diamondback Energy 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.