Correlation Between Lucara Diamond and Africa Oil

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

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

Diversification Opportunities for Lucara Diamond and Africa Oil

0.04

Correlation Coefficient

Lucara Diamond  Africa Oil

Significant diversification

The 3 months correlation between Lucara and Africa is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Lucara Diamond Corp 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 Lucara Diamond 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 Lucara Diamond Corp 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 Lucara Diamond i.e., Lucara Diamond and Africa Oil go up and down completely randomly.

Pair Corralation between Lucara Diamond and Africa Oil

Assuming the 90 days trading horizon Lucara Diamond Corp is expected to generate 1.75 times more return on investment than Africa Oil. However, Lucara Diamond is 1.75 times more volatile than Africa Oil Corp. It trades about 0.11 of its potential returns per unit of risk. Africa Oil Corp is currently generating about 0.04 per unit of risk. If you would invest  321.00  in Lucara Diamond Corp on September 4, 2024 and sell it today you would earn a total of  73.00  from holding Lucara Diamond Corp or generate 22.74% return on investment over 90 days.

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

Lucara Diamond Corp  vs.  Africa Oil Corp

Lucara Diamond Corp

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lucara Diamond Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain fundamental indicators, Lucara Diamond unveiled solid returns over the last few months and may actually be approaching a breakup point.

Africa Oil Corp

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Africa Oil Corp are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable forward indicators, Africa Oil is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Lucara Diamond and Africa Oil

The main advantage of trading using opposite Lucara Diamond and Africa Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lucara Diamond 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 Lucara Diamond Corp 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.