Correlation Between Ecopetrol and NACCO Industries

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

By analyzing existing cross correlation between Ecopetrol SA ADR and NACCO Industries, you can compare the effects of market volatilities on Ecopetrol and NACCO Industries 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 Ecopetrol with a short position of NACCO Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ecopetrol and NACCO Industries.

Diversification Opportunities for Ecopetrol and NACCO Industries

0.64

Correlation Coefficient

Ecopetrol  NACCO Industries

Poor diversification

The 3 months correlation between Ecopetrol and NACCO is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Ecopetrol SA ADR and NACCO Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NACCO Industries and Ecopetrol 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 Ecopetrol SA ADR are associated (or correlated) with NACCO Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NACCO Industries has no effect on the direction of Ecopetrol i.e., Ecopetrol and NACCO Industries go up and down completely randomly.

Pair Corralation between Ecopetrol and NACCO Industries

Allowing for the 90-day total investment horizon Ecopetrol SA ADR is expected to generate 1.66 times more return on investment than NACCO Industries. However, Ecopetrol is 1.66 times more volatile than NACCO Industries. It trades about 0.2 of its potential returns per unit of risk. NACCO Industries is currently generating about 0.0 per unit of risk. If you would invest  803.00  in Ecopetrol SA ADR on November 28, 2024 and sell it today you would earn a total of  236.00  from holding Ecopetrol SA ADR or generate 29.39% return on investment over 90 days.

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

Ecopetrol SA ADR  vs.  NACCO Industries

Ecopetrol SA ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ecopetrol SA ADR are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak fundamental indicators, Ecopetrol exhibited solid returns over the last few months and may actually be approaching a breakup point.

NACCO Industries

Risk-Adjusted Performance

Weak

Over the last 90 days NACCO Industries has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, NACCO Industries is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Ecopetrol and NACCO Industries

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

The idea behind Ecopetrol SA ADR and NACCO Industries 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.