Correlation Between BP Prudhoe and Permian Basin

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

Diversification Opportunities for BP Prudhoe and Permian Basin

0.03

Correlation Coefficient

BP Prudhoe  Permian Basin

Significant diversification

The 3 months correlation between BPT and Permian is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding BP Prudhoe Bay and Permian Basin Royalty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Permian Basin Royalty 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 Permian Basin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Permian Basin Royalty has no effect on the direction of BP Prudhoe i.e., BP Prudhoe and Permian Basin go up and down completely randomly.

Pair Corralation between BP Prudhoe and Permian Basin

Considering the 90-day investment horizon BP Prudhoe Bay is expected to generate 3.36 times more return on investment than Permian Basin. However, BP Prudhoe is 3.36 times more volatile than Permian Basin Royalty. It trades about 0.03 of its potential returns per unit of risk. Permian Basin Royalty is currently generating about -0.02 per unit of risk. If you would invest  60.00  in BP Prudhoe Bay on December 27, 2024 and sell it today you would lose (0.97) from holding BP Prudhoe Bay or give up 1.62% of portfolio value over 90 days.

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

BP Prudhoe Bay  vs.  Permian Basin Royalty

BP Prudhoe Bay

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BP Prudhoe Bay are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, BP Prudhoe unveiled solid returns over the last few months and may actually be approaching a breakup point.

Permian Basin Royalty

Risk-Adjusted Performance

Very Weak

Over the last 90 days Permian Basin Royalty has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental drivers, Permian Basin is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with BP Prudhoe and Permian Basin

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

The idea behind BP Prudhoe Bay and Permian Basin Royalty 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.