Correlation Between Shell PLC and BP PLC

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

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

Diversification Opportunities for Shell PLC and BP PLC

0.8

Correlation Coefficient

Shell PLC  BP PLC

Very poor diversification

The 3 months correlation between Shell and BP PLC is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Shell PLC ADR and BP PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP PLC ADR and Shell PLC 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 Shell PLC ADR are associated (or correlated) with BP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP PLC ADR has no effect on the direction of Shell PLC i.e., Shell PLC and BP PLC go up and down completely randomly.

Pair Corralation between Shell PLC and BP PLC

Given the investment horizon of 90 days Shell PLC is expected to generate 1.87 times less return on investment than BP PLC. But when comparing it to its historical volatility, Shell PLC ADR is 1.48 times less risky than BP PLC. It trades about 0.15 of its potential returns per unit of risk. BP PLC ADR is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  3,101  in BP PLC ADR on November 28, 2024 and sell it today you would earn a total of  222.00  from holding BP PLC ADR or generate 7.16% return on investment over 90 days.

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

Shell PLC ADR  vs.  BP PLC ADR

Shell PLC ADR

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shell PLC ADR are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent technical and fundamental indicators, Shell PLC is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

BP PLC ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BP PLC ADR are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, BP PLC reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Shell PLC and BP PLC

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

The idea behind Shell PLC ADR and BP PLC ADR 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.