Correlation Between Oil and Pakistan Petroleum

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

Diversification Opportunities for Oil and Pakistan Petroleum

0.88

Correlation Coefficient

Oil  Pakistan Petroleum

Very poor diversification

The 3 months correlation between Oil and Pakistan is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Oil and Gas and Pakistan Petroleum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pakistan Petroleum 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 Pakistan Petroleum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pakistan Petroleum has no effect on the direction of Oil i.e., Oil and Pakistan Petroleum go up and down completely randomly.

Pair Corralation between Oil and Pakistan Petroleum

Assuming the 90 days trading horizon Oil and Gas is expected to generate 0.87 times more return on investment than Pakistan Petroleum. However, Oil and Gas is 1.15 times less risky than Pakistan Petroleum. It trades about 0.05 of its potential returns per unit of risk. Pakistan Petroleum is currently generating about -0.01 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	Strong
Accuracy	100.0%
Values	Daily Returns

Oil and Gas  vs.  Pakistan Petroleum

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 current stock price disturbance, may contribute to short-term losses for the investors.

Pakistan Petroleum

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pakistan Petroleum has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Pakistan Petroleum is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Oil and Pakistan Petroleum

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

The idea behind Oil and Gas and Pakistan Petroleum 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.