Correlation Between Mesa Royalty and SM Energy

Can any of the company-specific risk be diversified away by investing in both Mesa Royalty and SM Energy 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 Mesa Royalty and SM Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Mesa Royalty Trust and SM Energy Co, you can compare the effects of market volatilities on Mesa Royalty and SM Energy 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 Mesa Royalty with a short position of SM Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mesa Royalty and SM Energy.

Diversification Opportunities for Mesa Royalty and SM Energy

0.31

Correlation Coefficient

Mesa Royalty  SM Energy

Weak diversification

The 3 months correlation between Mesa and SM Energy is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Mesa Royalty Trust and SM Energy Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SM Energy and Mesa Royalty 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 Mesa Royalty Trust are associated (or correlated) with SM Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SM Energy has no effect on the direction of Mesa Royalty i.e., Mesa Royalty and SM Energy go up and down completely randomly.

Pair Corralation between Mesa Royalty and SM Energy

Considering the 90-day investment horizon Mesa Royalty Trust is expected to generate 1.35 times more return on investment than SM Energy. However, Mesa Royalty is 1.35 times more volatile than SM Energy Co. It trades about -0.27 of its potential returns per unit of risk. SM Energy Co is currently generating about -0.39 per unit of risk. If you would invest  712.00  in Mesa Royalty Trust on September 27, 2024 and sell it today you would lose (107.00) from holding Mesa Royalty Trust or give up 15.03% of portfolio value over 90 days.

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

Mesa Royalty Trust  vs.  SM Energy Co

Mesa Royalty Trust

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Mesa Royalty Trust are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Mesa Royalty may actually be approaching a critical reversion point that can send shares even higher in January 2025.

SM Energy

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Mesa Royalty and SM Energy

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

The idea behind Mesa Royalty Trust and SM Energy Co 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.

Check out your portfolio center.

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.