Correlation Between Headwater Exploration and Prairie Provident

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

By analyzing existing cross correlation between Headwater Exploration and Prairie Provident Resources, you can compare the effects of market volatilities on Headwater Exploration and Prairie Provident 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 Headwater Exploration with a short position of Prairie Provident. Check out your portfolio center. Please also check ongoing floating volatility patterns of Headwater Exploration and Prairie Provident.

Diversification Opportunities for Headwater Exploration and Prairie Provident

0.7

Correlation Coefficient

Headwater Exploration  Prairie Provident

Poor diversification

The 3 months correlation between Headwater and Prairie is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Headwater Exploration and Prairie Provident Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prairie Provident and Headwater Exploration 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 Headwater Exploration are associated (or correlated) with Prairie Provident. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prairie Provident has no effect on the direction of Headwater Exploration i.e., Headwater Exploration and Prairie Provident go up and down completely randomly.

Pair Corralation between Headwater Exploration and Prairie Provident

Assuming the 90 days trading horizon Headwater Exploration is expected to generate 131.22 times less return on investment than Prairie Provident. But when comparing it to its historical volatility, Headwater Exploration is 4.27 times less risky than Prairie Provident. It trades about 0.0 of its potential returns per unit of risk. Prairie Provident Resources is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  3.00  in Prairie Provident Resources on December 23, 2024 and sell it today you would earn a total of  1.00  from holding Prairie Provident Resources or generate 33.33% return on investment over 90 days.

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

Headwater Exploration  vs.  Prairie Provident Resources

Headwater Exploration

Risk-Adjusted Performance

Very Weak

Over the last 90 days Headwater Exploration has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Headwater Exploration is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Prairie Provident

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Prairie Provident Resources are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Prairie Provident displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Headwater Exploration and Prairie Provident

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

The idea behind Headwater Exploration and Prairie Provident Resources 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.