Correlation Between Energy and Drilling Tools

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

By analyzing existing cross correlation between Energy and Environmental and Drilling Tools International, you can compare the effects of market volatilities on Energy and Drilling Tools 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 Drilling Tools. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy and Drilling Tools.

Diversification Opportunities for Energy and Drilling Tools

0.44

Correlation Coefficient

Energy  Drilling Tools

Very weak diversification

The 3 months correlation between Energy and Drilling is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Energy and Environmental and Drilling Tools International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Drilling Tools Inter 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 Environmental are associated (or correlated) with Drilling Tools. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Drilling Tools Inter has no effect on the direction of Energy i.e., Energy and Drilling Tools go up and down completely randomly.

Pair Corralation between Energy and Drilling Tools

Given the investment horizon of 90 days Energy and Environmental is expected to generate 2.09 times more return on investment than Drilling Tools. However, Energy is 2.09 times more volatile than Drilling Tools International. It trades about 0.01 of its potential returns per unit of risk. Drilling Tools International is currently generating about -0.04 per unit of risk. If you would invest  19.00  in Energy and Environmental on October 23, 2024 and sell it today you would lose (12.00) from holding Energy and Environmental or give up 63.16% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.8%
Values	Daily Returns

Energy and Environmental  vs.  Drilling Tools International

Energy and Environmental

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Energy and Environmental are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Energy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Drilling Tools Inter

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Drilling Tools International are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Drilling Tools is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Energy and Drilling Tools

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

The idea behind Energy and Environmental and Drilling Tools International 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.