Correlation Between SDX Energy and MDM Permian

Can any of the company-specific risk be diversified away by investing in both SDX 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 SDX 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 SDX Energy plc and MDM Permian, you can compare the effects of market volatilities on SDX 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 SDX Energy with a short position of MDM Permian. Check out your portfolio center. Please also check ongoing floating volatility patterns of SDX Energy and MDM Permian.

Diversification Opportunities for SDX Energy and MDM Permian

-0.02

Correlation Coefficient

SDX Energy  MDM Permian

Good diversification

The 3 months correlation between SDX and MDM is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding SDX Energy plc and MDM Permian in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MDM Permian and SDX 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 SDX Energy plc 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 SDX Energy i.e., SDX Energy and MDM Permian go up and down completely randomly.

Pair Corralation between SDX Energy and MDM Permian

Assuming the 90 days horizon SDX Energy plc is expected to generate 7.44 times more return on investment than MDM Permian. However, SDX Energy is 7.44 times more volatile than MDM Permian. It trades about 0.13 of its potential returns per unit of risk. MDM Permian is currently generating about 0.12 per unit of risk. If you would invest  0.41  in SDX Energy plc on December 26, 2024 and sell it today you would earn a total of  1.01  from holding SDX Energy plc or generate 246.34% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

SDX Energy plc  vs.  MDM Permian

SDX Energy plc

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SDX Energy plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady technical and fundamental indicators, SDX Energy reported solid returns over the last few months and may actually be approaching a breakup point.

MDM Permian

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MDM Permian are ranked lower than 9 (%) 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 SDX Energy and MDM Permian

The main advantage of trading using opposite SDX Energy and MDM Permian positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SDX 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 SDX Energy plc 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.

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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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.