Correlation Between Chesapeake Energy and Encanto Potash

Can any of the company-specific risk be diversified away by investing in both Chesapeake Energy and Encanto Potash 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 Chesapeake Energy and Encanto Potash into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Chesapeake Energy and Encanto Potash Corp, you can compare the effects of market volatilities on Chesapeake Energy and Encanto Potash 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 Chesapeake Energy with a short position of Encanto Potash. Check out your portfolio center. Please also check ongoing floating volatility patterns of Chesapeake Energy and Encanto Potash.

Diversification Opportunities for Chesapeake Energy and Encanto Potash

0.71

Correlation Coefficient

Chesapeake Energy  Encanto Potash

Poor diversification

The 3 months correlation between Chesapeake and Encanto is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Chesapeake Energy and Encanto Potash Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encanto Potash Corp and Chesapeake Energy 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 Chesapeake Energy are associated (or correlated) with Encanto Potash. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encanto Potash Corp has no effect on the direction of Chesapeake Energy i.e., Chesapeake Energy and Encanto Potash go up and down completely randomly.

Pair Corralation between Chesapeake Energy and Encanto Potash

Assuming the 90 days horizon Chesapeake Energy is expected to generate 251.38 times less return on investment than Encanto Potash. But when comparing it to its historical volatility, Chesapeake Energy is 16.99 times less risky than Encanto Potash. It trades about 0.0 of its potential returns per unit of risk. Encanto Potash Corp is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1.12  in Encanto Potash Corp on September 12, 2024 and sell it today you would earn a total of  1.97  from holding Encanto Potash Corp or generate 175.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.9%
Values	Daily Returns

Chesapeake Energy  vs.  Encanto Potash Corp

Chesapeake Energy

Risk-Adjusted Performance

0 of 100

Very Strong

Over the last 90 days Chesapeake Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite weak technical and fundamental indicators, Chesapeake Energy disclosed solid returns over the last few months and may actually be approaching a breakup point.

Encanto Potash Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Encanto Potash Corp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unfluctuating performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Chesapeake Energy and Encanto Potash

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

The idea behind Chesapeake Energy and Encanto Potash Corp 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.

Check out your portfolio center.

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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.