Correlation Between Freeport McMoRan and NorAm Drilling

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

By analyzing existing cross correlation between Freeport McMoRan and NorAm Drilling AS, you can compare the effects of market volatilities on Freeport McMoRan and NorAm Drilling 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 Freeport McMoRan with a short position of NorAm Drilling. Check out your portfolio center. Please also check ongoing floating volatility patterns of Freeport McMoRan and NorAm Drilling.

Diversification Opportunities for Freeport McMoRan and NorAm Drilling

0.53

Correlation Coefficient

Freeport McMoRan  NorAm Drilling

Very weak diversification

The 3 months correlation between Freeport and NorAm is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Freeport McMoRan and NorAm Drilling AS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NorAm Drilling AS and Freeport McMoRan 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 Freeport McMoRan are associated (or correlated) with NorAm Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NorAm Drilling AS has no effect on the direction of Freeport McMoRan i.e., Freeport McMoRan and NorAm Drilling go up and down completely randomly.

Pair Corralation between Freeport McMoRan and NorAm Drilling

Assuming the 90 days trading horizon Freeport McMoRan is expected to generate 15.23 times less return on investment than NorAm Drilling. But when comparing it to its historical volatility, Freeport McMoRan is 4.97 times less risky than NorAm Drilling. It trades about 0.02 of its potential returns per unit of risk. NorAm Drilling AS is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  108.00  in NorAm Drilling AS on September 19, 2024 and sell it today you would earn a total of  171.00  from holding NorAm Drilling AS or generate 158.33% return on investment over 90 days.

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

Freeport McMoRan  vs.  NorAm Drilling AS

Freeport McMoRan

Risk-Adjusted Performance

0 of 100

Very Weak

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

NorAm Drilling AS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NorAm Drilling AS has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Freeport McMoRan and NorAm Drilling

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

The idea behind Freeport McMoRan and NorAm Drilling AS 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.