Correlation Between BHP Group and Encanto Potash

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

By analyzing existing cross correlation between BHP Group Limited and Encanto Potash Corp, you can compare the effects of market volatilities on BHP Group and Encanto Potash 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 BHP Group with a short position of Encanto Potash. Check out your portfolio center. Please also check ongoing floating volatility patterns of BHP Group and Encanto Potash.

Diversification Opportunities for BHP Group and Encanto Potash

0.5

Correlation Coefficient

BHP Group  Encanto Potash

Very weak diversification

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

Pair Corralation between BHP Group and Encanto Potash

Considering the 90-day investment horizon BHP Group Limited is expected to generate 1.88 times more return on investment than Encanto Potash. However, BHP Group is 1.88 times more volatile than Encanto Potash Corp. It trades about 0.03 of its potential returns per unit of risk. Encanto Potash Corp is currently generating about -0.13 per unit of risk. If you would invest  5,220  in BHP Group Limited on September 12, 2024 and sell it today you would earn a total of  120.00  from holding BHP Group Limited or generate 2.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

BHP Group Limited  vs.  Encanto Potash Corp

BHP Group Limited

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BHP Group Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical indicators, BHP Group is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Encanto Potash Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Encanto Potash Corp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unfluctuating performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with BHP Group and Encanto Potash

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

The idea behind BHP Group Limited and Encanto Potash 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.