Correlation Between BP PLC and Shell PLC

Can any of the company-specific risk be diversified away by investing in both BP PLC and Shell 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 BP PLC and Shell PLC 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 Shell PLC ADR, you can compare the effects of market volatilities on BP PLC and Shell 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 BP PLC with a short position of Shell PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of BP PLC and Shell PLC.

Diversification Opportunities for BP PLC and Shell PLC

0.8

Correlation Coefficient

BP PLC  Shell PLC

Very poor diversification

The 3 months correlation between BP PLC and Shell is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding BP PLC ADR and Shell PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shell PLC ADR 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 Shell PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shell PLC ADR has no effect on the direction of BP PLC i.e., BP PLC and Shell PLC go up and down completely randomly.

Pair Corralation between BP PLC and Shell PLC

Allowing for the 90-day total investment horizon BP PLC ADR is expected to under-perform the Shell PLC. In addition to that, BP PLC is 1.19 times more volatile than Shell PLC ADR. It trades about -0.13 of its total potential returns per unit of risk. Shell PLC ADR is currently generating about -0.1 per unit of volatility. If you would invest  7,091  in Shell PLC ADR on August 30, 2024 and sell it today you would lose (600.00) from holding Shell PLC ADR or give up 8.46% of portfolio value over 90 days.

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

BP PLC ADR  vs.  Shell PLC ADR

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 unsteady performance in the last few months, the Stock's basic indicators remain relatively invariable which may send shares a bit higher in December 2024. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

Shell PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shell PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's technical and fundamental indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with BP PLC and Shell PLC

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

The idea behind BP PLC ADR and Shell PLC ADR 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.