Correlation Between Seadrill and IPG Photonics

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

By analyzing existing cross correlation between Seadrill Limited and IPG Photonics, you can compare the effects of market volatilities on Seadrill and IPG Photonics 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 IPG Photonics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Seadrill and IPG Photonics.

Diversification Opportunities for Seadrill and IPG Photonics

-0.13

Correlation Coefficient

Seadrill  IPG Photonics

Good diversification

The 3 months correlation between Seadrill and IPG is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Seadrill Limited and IPG Photonics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IPG Photonics 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 IPG Photonics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IPG Photonics has no effect on the direction of Seadrill i.e., Seadrill and IPG Photonics go up and down completely randomly.

Pair Corralation between Seadrill and IPG Photonics

Given the investment horizon of 90 days Seadrill Limited is expected to generate 0.97 times more return on investment than IPG Photonics. However, Seadrill Limited is 1.03 times less risky than IPG Photonics. It trades about -0.04 of its potential returns per unit of risk. IPG Photonics is currently generating about -0.05 per unit of risk. If you would invest  4,801  in Seadrill Limited on September 20, 2024 and sell it today you would lose (1,141) from holding Seadrill Limited or give up 23.77% of portfolio value over 90 days.

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

Seadrill Limited  vs.  IPG Photonics

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 latest unfluctuating performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

IPG Photonics

Risk-Adjusted Performance

5 of 100

Insignificant

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

Pair Trading with Seadrill and IPG Photonics

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

The idea behind Seadrill Limited and IPG Photonics 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.