Correlation Between BW LPG and Reach Subsea

Can any of the company-specific risk be diversified away by investing in both BW LPG and Reach Subsea 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 BW LPG and Reach Subsea into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BW LPG and Reach Subsea, you can compare the effects of market volatilities on BW LPG and Reach Subsea 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 BW LPG with a short position of Reach Subsea. Check out your portfolio center. Please also check ongoing floating volatility patterns of BW LPG and Reach Subsea.

Diversification Opportunities for BW LPG and Reach Subsea

0.59

Correlation Coefficient

BW LPG  Reach Subsea

Very weak diversification

The 3 months correlation between BWLPG and Reach is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding BW LPG and Reach Subsea in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reach Subsea and BW LPG 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 BW LPG are associated (or correlated) with Reach Subsea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reach Subsea has no effect on the direction of BW LPG i.e., BW LPG and Reach Subsea go up and down completely randomly.

Pair Corralation between BW LPG and Reach Subsea

Assuming the 90 days trading horizon BW LPG is expected to generate 1.06 times more return on investment than Reach Subsea. However, BW LPG is 1.06 times more volatile than Reach Subsea. It trades about -0.01 of its potential returns per unit of risk. Reach Subsea is currently generating about -0.03 per unit of risk. If you would invest  12,056  in BW LPG on December 28, 2024 and sell it today you would lose (416.00) from holding BW LPG or give up 3.45% of portfolio value over 90 days.

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

BW LPG  vs.  Reach Subsea

BW LPG

Risk-Adjusted Performance

Very Weak

Over the last 90 days BW LPG has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, BW LPG is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Reach Subsea

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reach Subsea has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Reach Subsea is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BW LPG and Reach Subsea

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

The idea behind BW LPG and Reach Subsea 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.