Correlation Between NatWest Group and BP PLC

Can any of the company-specific risk be diversified away by investing in both NatWest Group and BP PLC 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 NatWest Group and BP PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for NatWest Group and BP PLC

0.69

Correlation Coefficient

NatWest Group  BP PLC

Poor diversification

The 3 months correlation between NatWest and BP PLC is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding NatWest Group PLC and BP PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP PLC and NatWest Group 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 NatWest Group PLC are associated (or correlated) with BP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP PLC has no effect on the direction of NatWest Group i.e., NatWest Group and BP PLC go up and down completely randomly.

Pair Corralation between NatWest Group and BP PLC

Assuming the 90 days trading horizon NatWest Group is expected to generate 1.08 times less return on investment than BP PLC. In addition to that, NatWest Group is 1.04 times more volatile than BP PLC. It trades about 0.14 of its total potential returns per unit of risk. BP PLC is currently generating about 0.16 per unit of volatility. If you would invest  38,021  in BP PLC on November 28, 2024 and sell it today you would earn a total of  5,669  from holding BP PLC or generate 14.91% return on investment over 90 days.

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

NatWest Group PLC  vs.  BP PLC

NatWest Group PLC

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NatWest Group PLC are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, NatWest Group exhibited solid returns over the last few months and may actually be approaching a breakup point.

BP PLC

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BP PLC are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, BP PLC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NatWest Group and BP PLC

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

The idea behind NatWest Group PLC and BP PLC 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.