Correlation Between Oil and Big Bird

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

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

Diversification Opportunities for Oil and Big Bird

0.29

Correlation Coefficient

Oil  Big Bird

Modest diversification

The 3 months correlation between Oil and Big is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Oil and Gas and Big Bird Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Big Bird Foods and 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 Oil and Gas are associated (or correlated) with Big Bird. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Big Bird Foods has no effect on the direction of Oil i.e., Oil and Big Bird go up and down completely randomly.

Pair Corralation between Oil and Big Bird

Assuming the 90 days trading horizon Oil and Gas is expected to generate 0.57 times more return on investment than Big Bird. However, Oil and Gas is 1.74 times less risky than Big Bird. It trades about 0.05 of its potential returns per unit of risk. Big Bird Foods is currently generating about -0.03 per unit of risk. If you would invest  22,138  in Oil and Gas on December 28, 2024 and sell it today you would earn a total of  1,135  from holding Oil and Gas or generate 5.13% return on investment over 90 days.

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

Oil and Gas  vs.  Big Bird Foods

Oil and Gas

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Oil and Gas are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Oil is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Big Bird Foods

Risk-Adjusted Performance

Very Weak

Over the last 90 days Big Bird Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Big Bird is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Oil and Big Bird

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

The idea behind Oil and Gas and Big Bird Foods 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..