Correlation Between Seadrill and China Conch

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

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

Diversification Opportunities for Seadrill and China Conch

-0.26

Correlation Coefficient

Seadrill  China Conch

Very good diversification

The 3 months correlation between Seadrill and China is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Seadrill Limited and China Conch Venture in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Conch Venture and Seadrill 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 Seadrill Limited are associated (or correlated) with China Conch. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Conch Venture has no effect on the direction of Seadrill i.e., Seadrill and China Conch go up and down completely randomly.

Pair Corralation between Seadrill and China Conch

Given the investment horizon of 90 days Seadrill Limited is expected to under-perform the China Conch. But the stock apears to be less risky and, when comparing its historical volatility, Seadrill Limited is 2.02 times less risky than China Conch. The stock trades about -0.06 of its potential returns per unit of risk. The China Conch Venture is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  78.00  in China Conch Venture on October 6, 2024 and sell it today you would earn a total of  15.00  from holding China Conch Venture or generate 19.23% return on investment over 90 days.

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

Seadrill Limited  vs.  China Conch Venture

Seadrill Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Seadrill Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Seadrill is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

China Conch Venture

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Conch Venture are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, China Conch reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Seadrill and China Conch

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

The idea behind Seadrill Limited and China Conch Venture 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.