Correlation Between Imperial Oil and BP PLC

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

By analyzing existing cross correlation between Imperial Oil and BP PLC ADR, you can compare the effects of market volatilities on Imperial Oil and BP PLC 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 Imperial Oil with a short position of BP PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Imperial Oil and BP PLC.

Diversification Opportunities for Imperial Oil and BP PLC

0.79

Correlation Coefficient

Imperial Oil  BP PLC

Poor diversification

The 3 months correlation between Imperial and BP PLC is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Oil and BP PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP PLC ADR and Imperial Oil 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 Imperial Oil are associated (or correlated) with BP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP PLC ADR has no effect on the direction of Imperial Oil i.e., Imperial Oil and BP PLC go up and down completely randomly.

Pair Corralation between Imperial Oil and BP PLC

Considering the 90-day investment horizon Imperial Oil is expected to generate 1.04 times less return on investment than BP PLC. In addition to that, Imperial Oil is 1.25 times more volatile than BP PLC ADR. It trades about 0.14 of its total potential returns per unit of risk. BP PLC ADR is currently generating about 0.19 per unit of volatility. If you would invest  2,869  in BP PLC ADR on December 28, 2024 and sell it today you would earn a total of  517.00  from holding BP PLC ADR or generate 18.02% return on investment over 90 days.

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

Imperial Oil  vs.  BP PLC ADR

Imperial Oil

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Oil are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain primary indicators, Imperial Oil displayed solid returns over the last few months and may actually be approaching a breakup point.

BP PLC ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BP PLC ADR are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, BP PLC reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Imperial Oil and BP PLC

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

The idea behind Imperial Oil and BP PLC ADR 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.