Correlation Between Major Drilling and CBOE Crude

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

By analyzing existing cross correlation between Major Drilling Group and CBOE Crude Oil, you can compare the effects of market volatilities on Major Drilling and CBOE Crude 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 Major Drilling with a short position of CBOE Crude. Check out your portfolio center. Please also check ongoing floating volatility patterns of Major Drilling and CBOE Crude.

Diversification Opportunities for Major Drilling and CBOE Crude

-0.14

Correlation Coefficient

Major Drilling  CBOE Crude

Good diversification

The 3 months correlation between Major and CBOE is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Major Drilling Group and CBOE Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CBOE Crude Oil and Major Drilling 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 Major Drilling Group are associated (or correlated) with CBOE Crude. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CBOE Crude Oil has no effect on the direction of Major Drilling i.e., Major Drilling and CBOE Crude go up and down completely randomly.

Pair Corralation between Major Drilling and CBOE Crude

Assuming the 90 days horizon Major Drilling Group is expected to under-perform the CBOE Crude. But the pink sheet apears to be less risky and, when comparing its historical volatility, Major Drilling Group is 3.26 times less risky than CBOE Crude. The pink sheet trades about -0.03 of its potential returns per unit of risk. The CBOE Crude Oil is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  3,016  in CBOE Crude Oil on December 21, 2024 and sell it today you would earn a total of  371.00  from holding CBOE Crude Oil or generate 12.3% return on investment over 90 days.

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

Major Drilling Group  vs.  CBOE Crude Oil

Pair Trading with Major Drilling and CBOE Crude

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

The idea behind Major Drilling Group and CBOE Crude Oil 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.