Correlation Between East West and Africa Oil

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

By analyzing existing cross correlation between East West Petroleum and Africa Oil Corp, you can compare the effects of market volatilities on East West and Africa Oil 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 East West with a short position of Africa Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of East West and Africa Oil.

Diversification Opportunities for East West and Africa Oil

0.03

Correlation Coefficient

East West  Africa Oil

Significant diversification

The 3 months correlation between East and Africa is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding East West Petroleum and Africa Oil Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Africa Oil Corp and East West 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 East West Petroleum are associated (or correlated) with Africa Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Africa Oil Corp has no effect on the direction of East West i.e., East West and Africa Oil go up and down completely randomly.

Pair Corralation between East West and Africa Oil

Assuming the 90 days horizon East West Petroleum is expected to generate 22.36 times more return on investment than Africa Oil. However, East West is 22.36 times more volatile than Africa Oil Corp. It trades about 0.2 of its potential returns per unit of risk. Africa Oil Corp is currently generating about -0.01 per unit of risk. If you would invest  7.00  in East West Petroleum on October 4, 2024 and sell it today you would lose (4.50) from holding East West Petroleum or give up 64.29% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.6%
Values	Daily Returns

East West Petroleum  vs.  Africa Oil Corp

East West Petroleum

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East West Petroleum are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak primary indicators, East West reported solid returns over the last few months and may actually be approaching a breakup point.

Africa Oil Corp

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with East West and Africa Oil

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

The idea behind East West Petroleum and Africa Oil 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.

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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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.