Correlation Between Energy Services and Energy Fund

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

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

Diversification Opportunities for Energy Services and Energy Fund

0.89

Correlation Coefficient

Energy Services  Energy Fund

Very poor diversification

The 3 months correlation between Energy and Energy is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Energy Services Fund and Energy Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Class and Energy Services 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 Energy Services Fund are associated (or correlated) with Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Class has no effect on the direction of Energy Services i.e., Energy Services and Energy Fund go up and down completely randomly.

Pair Corralation between Energy Services and Energy Fund

Assuming the 90 days horizon Energy Services Fund is expected to generate 1.65 times more return on investment than Energy Fund. However, Energy Services is 1.65 times more volatile than Energy Fund Class. It trades about 0.06 of its potential returns per unit of risk. Energy Fund Class is currently generating about 0.09 per unit of risk. If you would invest  21,454  in Energy Services Fund on September 2, 2024 and sell it today you would earn a total of  1,253  from holding Energy Services Fund or generate 5.84% return on investment over 90 days.

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

Energy Services Fund  vs.  Energy Fund Class

Energy Services

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Services Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Energy Services may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Energy Fund Class

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Fund Class are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Energy Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Energy Services and Energy Fund

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

The idea behind Energy Services Fund and Energy Fund Class 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.