Correlation Between Energy and CO2 Solutions

Can any of the company-specific risk be diversified away by investing in both Energy and CO2 Solutions 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 Energy and CO2 Solutions into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Energy and Water and CO2 Solutions, you can compare the effects of market volatilities on Energy and CO2 Solutions 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 Energy with a short position of CO2 Solutions. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy and CO2 Solutions.

Diversification Opportunities for Energy and CO2 Solutions

0.0

Correlation Coefficient

Energy  CO2 Solutions

Pay attention - limited upside

The 3 months correlation between Energy and CO2 is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Energy and Water and CO2 Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CO2 Solutions and 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 Energy and Water are associated (or correlated) with CO2 Solutions. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CO2 Solutions has no effect on the direction of Energy i.e., Energy and CO2 Solutions go up and down completely randomly.

Pair Corralation between Energy and CO2 Solutions

Given the investment horizon of 90 days Energy and Water is expected to generate 3.06 times more return on investment than CO2 Solutions. However, Energy is 3.06 times more volatile than CO2 Solutions. It trades about 0.03 of its potential returns per unit of risk. CO2 Solutions is currently generating about -0.05 per unit of risk. If you would invest  4.40  in Energy and Water on November 20, 2024 and sell it today you would lose (4.03) from holding Energy and Water or give up 91.59% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Energy and Water  vs.  CO2 Solutions

Energy and Water

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Energy and Water are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

CO2 Solutions

Risk-Adjusted Performance

Very Weak

Over the last 90 days CO2 Solutions has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, CO2 Solutions is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Energy and CO2 Solutions

The main advantage of trading using opposite Energy and CO2 Solutions positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Energy position performs unexpectedly, CO2 Solutions 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 CO2 Solutions will offset losses from the drop in CO2 Solutions' long position.

The idea behind Energy and Water and CO2 Solutions 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.