Correlation Between North American and Oil States

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

By analyzing existing cross correlation between North American Construction and Oil States International, you can compare the effects of market volatilities on North American and Oil States 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 North American with a short position of Oil States. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Oil States.

Diversification Opportunities for North American and Oil States

0.63

Correlation Coefficient

North American  Oil States

Poor diversification

The 3 months correlation between North and Oil is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Oil States International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Oil States International and North American 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 North American Construction are associated (or correlated) with Oil States. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Oil States International has no effect on the direction of North American i.e., North American and Oil States go up and down completely randomly.

Pair Corralation between North American and Oil States

Considering the 90-day investment horizon North American Construction is expected to under-perform the Oil States. In addition to that, North American is 1.12 times more volatile than Oil States International. It trades about -0.08 of its total potential returns per unit of risk. Oil States International is currently generating about 0.59 per unit of volatility. If you would invest  471.00  in Oil States International on October 22, 2024 and sell it today you would earn a total of  103.00  from holding Oil States International or generate 21.87% return on investment over 90 days.

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

North American Construction  vs.  Oil States International

North American Const

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, North American sustained solid returns over the last few months and may actually be approaching a breakup point.

Oil States International

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Oil States International are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent forward indicators, Oil States unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North American and Oil States

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

The idea behind North American Construction and Oil States International 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.