Correlation Between Energy and United States

Can any of the company-specific risk be diversified away by investing in both Energy and United States 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 United States 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 United States Steel, you can compare the effects of market volatilities on Energy and United States 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 United States. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy and United States.

Diversification Opportunities for Energy and United States

-0.06

Correlation Coefficient

Energy  United States

Good diversification

The 3 months correlation between Energy and United is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Energy and Environmental and United States Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United States Steel 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 United States. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United States Steel has no effect on the direction of Energy i.e., Energy and United States go up and down completely randomly.

Pair Corralation between Energy and United States

Given the investment horizon of 90 days Energy and Environmental is expected to generate 1.31 times more return on investment than United States. However, Energy is 1.31 times more volatile than United States Steel. It trades about -0.09 of its potential returns per unit of risk. United States Steel is currently generating about -0.17 per unit of risk. If you would invest  8.00  in Energy and Environmental on October 9, 2024 and sell it today you would lose (1.00) from holding Energy and Environmental or give up 12.5% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.0%
Values	Daily Returns

Energy and Environmental  vs.  United States Steel

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 abnormal basic indicators, Energy may actually be approaching a critical reversion point that can send shares even higher in February 2025.

United States Steel

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days United States Steel has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, United States is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Energy and United States

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

The idea behind Energy and Environmental and United States Steel 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.