Correlation Between Oil and Engro Fertilizers

Can any of the company-specific risk be diversified away by investing in both Oil and Engro Fertilizers 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 Engro Fertilizers 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 Engro Fertilizers, you can compare the effects of market volatilities on Oil and Engro Fertilizers 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 Engro Fertilizers. Check out your portfolio center. Please also check ongoing floating volatility patterns of Oil and Engro Fertilizers.

Diversification Opportunities for Oil and Engro Fertilizers

0.73

Correlation Coefficient

Oil  Engro Fertilizers

Poor diversification

The 3 months correlation between Oil and Engro is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Oil and Gas and Engro Fertilizers in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Engro Fertilizers 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 Engro Fertilizers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Engro Fertilizers has no effect on the direction of Oil i.e., Oil and Engro Fertilizers go up and down completely randomly.

Pair Corralation between Oil and Engro Fertilizers

Assuming the 90 days trading horizon Oil and Gas is expected to generate 1.56 times more return on investment than Engro Fertilizers. However, Oil is 1.56 times more volatile than Engro Fertilizers. It trades about 0.36 of its potential returns per unit of risk. Engro Fertilizers is currently generating about 0.09 per unit of risk. If you would invest  17,953  in Oil and Gas on September 27, 2024 and sell it today you would earn a total of  5,060  from holding Oil and Gas or generate 28.18% return on investment over 90 days.

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

Oil and Gas  vs.  Engro Fertilizers

Oil and Gas

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Oil and Gas are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Oil sustained solid returns over the last few months and may actually be approaching a breakup point.

Engro Fertilizers

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Engro Fertilizers are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite weak technical and fundamental indicators, Engro Fertilizers may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Oil and Engro Fertilizers

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

The idea behind Oil and Gas and Engro Fertilizers 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.