Correlation Between BP PLC and China Petroleum

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

Diversification Opportunities for BP PLC and China Petroleum

0.28

Correlation Coefficient

BP PLC  China Petroleum

Modest diversification

The 3 months correlation between BP PLC and China is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding BP PLC ADR and China Petroleum Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Petroleum Chemical 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 China Petroleum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Petroleum Chemical has no effect on the direction of BP PLC i.e., BP PLC and China Petroleum go up and down completely randomly.

Pair Corralation between BP PLC and China Petroleum

Allowing for the 90-day total investment horizon BP PLC ADR is expected to under-perform the China Petroleum. But the stock apears to be less risky and, when comparing its historical volatility, BP PLC ADR is 3.57 times less risky than China Petroleum. The stock trades about 0.0 of its potential returns per unit of risk. The China Petroleum Chemical is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  15.00  in China Petroleum Chemical on November 28, 2024 and sell it today you would earn a total of  39.00  from holding China Petroleum Chemical or generate 260.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	91.7%
Values	Daily Returns

BP PLC ADR  vs.  China Petroleum Chemical

BP PLC ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BP PLC ADR are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, BP PLC reported solid returns over the last few months and may actually be approaching a breakup point.

China Petroleum Chemical

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Petroleum Chemical are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, China Petroleum reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BP PLC and China Petroleum

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

The idea behind BP PLC ADR and China Petroleum Chemical 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.