Correlation Between Otto Energy and MDM Permian

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

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

Diversification Opportunities for Otto Energy and MDM Permian

-0.01

Correlation Coefficient

Otto Energy  MDM Permian

Good diversification

The 3 months correlation between Otto and MDM is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Otto Energy Limited and MDM Permian in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MDM Permian and Otto Energy 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 Otto Energy Limited are associated (or correlated) with MDM Permian. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MDM Permian has no effect on the direction of Otto Energy i.e., Otto Energy and MDM Permian go up and down completely randomly.

Pair Corralation between Otto Energy and MDM Permian

Assuming the 90 days horizon Otto Energy Limited is expected to generate 6.45 times more return on investment than MDM Permian. However, Otto Energy is 6.45 times more volatile than MDM Permian. It trades about 0.08 of its potential returns per unit of risk. MDM Permian is currently generating about 0.04 per unit of risk. If you would invest  1.00  in Otto Energy Limited on September 13, 2024 and sell it today you would lose (0.69) from holding Otto Energy Limited or give up 69.0% of portfolio value over 90 days.

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

Otto Energy Limited  vs.  MDM Permian

Otto Energy Limited

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Otto Energy Limited are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Otto Energy reported solid returns over the last few months and may actually be approaching a breakup point.

MDM Permian

Risk-Adjusted Performance

3 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in MDM Permian are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile primary indicators, MDM Permian reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Otto Energy and MDM Permian

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

The idea behind Otto Energy Limited and MDM Permian 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.