Correlation Between Shell PLC and Petrleo Brasileiro

Can any of the company-specific risk be diversified away by investing in both Shell PLC and Petrleo Brasileiro 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 Petrleo Brasileiro 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 Petrleo Brasileiro SA, you can compare the effects of market volatilities on Shell PLC and Petrleo Brasileiro 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 Petrleo Brasileiro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shell PLC and Petrleo Brasileiro.

Diversification Opportunities for Shell PLC and Petrleo Brasileiro

0.2

Correlation Coefficient

Shell PLC  Petrleo Brasileiro

Modest diversification

The 3 months correlation between Shell and Petrleo is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Shell PLC ADR and Petrleo Brasileiro SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Petrleo Brasileiro 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 Petrleo Brasileiro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Petrleo Brasileiro has no effect on the direction of Shell PLC i.e., Shell PLC and Petrleo Brasileiro go up and down completely randomly.

Pair Corralation between Shell PLC and Petrleo Brasileiro

Given the investment horizon of 90 days Shell PLC ADR is expected to under-perform the Petrleo Brasileiro. But the stock apears to be less risky and, when comparing its historical volatility, Shell PLC ADR is 1.19 times less risky than Petrleo Brasileiro. The stock trades about -0.05 of its potential returns per unit of risk. The Petrleo Brasileiro SA is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,350  in Petrleo Brasileiro SA on September 14, 2024 and sell it today you would lose (25.00) from holding Petrleo Brasileiro SA or give up 1.85% of portfolio value over 90 days.

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

Shell PLC ADR  vs.  Petrleo Brasileiro SA

Shell PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shell PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Petrleo Brasileiro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Petrleo Brasileiro SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Petrleo Brasileiro is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Shell PLC and Petrleo Brasileiro

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

The idea behind Shell PLC ADR and Petrleo Brasileiro SA 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.