Correlation Between BP Prudhoe and Mesa Royalty

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

By analyzing existing cross correlation between BP Prudhoe Bay and Mesa Royalty Trust, you can compare the effects of market volatilities on BP Prudhoe and Mesa Royalty 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 Prudhoe with a short position of Mesa Royalty. Check out your portfolio center. Please also check ongoing floating volatility patterns of BP Prudhoe and Mesa Royalty.

Diversification Opportunities for BP Prudhoe and Mesa Royalty

-0.45

Correlation Coefficient

BP Prudhoe  Mesa Royalty

Very good diversification

The 3 months correlation between BPT and Mesa is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding BP Prudhoe Bay and Mesa Royalty Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mesa Royalty Trust and BP Prudhoe 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 Prudhoe Bay are associated (or correlated) with Mesa Royalty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mesa Royalty Trust has no effect on the direction of BP Prudhoe i.e., BP Prudhoe and Mesa Royalty go up and down completely randomly.

Pair Corralation between BP Prudhoe and Mesa Royalty

Considering the 90-day investment horizon BP Prudhoe Bay is expected to generate 3.33 times more return on investment than Mesa Royalty. However, BP Prudhoe is 3.33 times more volatile than Mesa Royalty Trust. It trades about 0.01 of its potential returns per unit of risk. Mesa Royalty Trust is currently generating about 0.02 per unit of risk. If you would invest  64.00  in BP Prudhoe Bay on December 26, 2024 and sell it today you would lose (8.00) from holding BP Prudhoe Bay or give up 12.5% of portfolio value over 90 days.

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

BP Prudhoe Bay  vs.  Mesa Royalty Trust

BP Prudhoe Bay

Risk-Adjusted Performance

Very Weak

Over the last 90 days BP Prudhoe Bay has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, BP Prudhoe is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Mesa Royalty Trust

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Mesa Royalty Trust are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Mesa Royalty is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with BP Prudhoe and Mesa Royalty

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

The idea behind BP Prudhoe Bay and Mesa Royalty Trust 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.