Correlation Between Northern Oil and Southwestern Energy

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

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

Diversification Opportunities for Northern Oil and Southwestern Energy

-0.05

Correlation Coefficient

Northern Oil  Southwestern Energy

Good diversification

The 3 months correlation between Northern and Southwestern is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Northern Oil Gas and Southwestern Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwestern Energy and Northern 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 Northern Oil Gas are associated (or correlated) with Southwestern Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwestern Energy has no effect on the direction of Northern Oil i.e., Northern Oil and Southwestern Energy go up and down completely randomly.

Pair Corralation between Northern Oil and Southwestern Energy

Considering the 90-day investment horizon Northern Oil is expected to generate 2.73 times less return on investment than Southwestern Energy. In addition to that, Northern Oil is 1.32 times more volatile than Southwestern Energy. It trades about 0.08 of its total potential returns per unit of risk. Southwestern Energy is currently generating about 0.27 per unit of volatility. If you would invest  638.00  in Southwestern Energy on August 30, 2024 and sell it today you would earn a total of  73.00  from holding Southwestern Energy or generate 11.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	34.38%
Values	Daily Returns

Northern Oil Gas  vs.  Southwestern Energy

Northern Oil Gas

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Oil Gas are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Northern Oil may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Southwestern Energy

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days Southwestern Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very weak basic indicators, Southwestern Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Northern Oil and Southwestern Energy

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

The idea behind Northern Oil Gas and Southwestern Energy 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 Transaction History module to view history of all your transactions and understand their impact on performance.