Correlation Between BP PLC and NACCO Industries

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

By analyzing existing cross correlation between BP PLC ADR and NACCO Industries, you can compare the effects of market volatilities on BP PLC and NACCO Industries 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 BP PLC with a short position of NACCO Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of BP PLC and NACCO Industries.

Diversification Opportunities for BP PLC and NACCO Industries

-0.75

Correlation Coefficient

BP PLC  NACCO Industries

Pay attention - limited upside

The 3 months correlation between BP PLC and NACCO is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding BP PLC ADR and NACCO Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NACCO Industries and BP PLC 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 BP PLC ADR are associated (or correlated) with NACCO Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NACCO Industries has no effect on the direction of BP PLC i.e., BP PLC and NACCO Industries go up and down completely randomly.

Pair Corralation between BP PLC and NACCO Industries

Allowing for the 90-day total investment horizon BP PLC ADR is expected to under-perform the NACCO Industries. But the stock apears to be less risky and, when comparing its historical volatility, BP PLC ADR is 1.95 times less risky than NACCO Industries. The stock trades about -0.1 of its potential returns per unit of risk. The NACCO Industries is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  3,187  in NACCO Industries on September 1, 2024 and sell it today you would earn a total of  34.00  from holding NACCO Industries or generate 1.07% return on investment over 90 days.

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

BP PLC ADR  vs.  NACCO Industries

BP PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BP PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest unsteady performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

NACCO Industries

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NACCO Industries are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak fundamental indicators, NACCO Industries exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BP PLC and NACCO Industries

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

The idea behind BP PLC ADR and NACCO Industries 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.