Correlation Between SM Energy and ConocoPhillips

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

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

Diversification Opportunities for SM Energy and ConocoPhillips

0.72

Correlation Coefficient

SM Energy  ConocoPhillips

Poor diversification

The 3 months correlation between SM Energy and ConocoPhillips is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding SM Energy Co and ConocoPhillips in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ConocoPhillips and SM 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 SM Energy Co are associated (or correlated) with ConocoPhillips. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ConocoPhillips has no effect on the direction of SM Energy i.e., SM Energy and ConocoPhillips go up and down completely randomly.

Pair Corralation between SM Energy and ConocoPhillips

Allowing for the 90-day total investment horizon SM Energy Co is expected to generate 1.36 times more return on investment than ConocoPhillips. However, SM Energy is 1.36 times more volatile than ConocoPhillips. It trades about 0.0 of its potential returns per unit of risk. ConocoPhillips is currently generating about -0.03 per unit of risk. If you would invest  4,542  in SM Energy Co on August 30, 2024 and sell it today you would lose (59.00) from holding SM Energy Co or give up 1.3% of portfolio value over 90 days.

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

SM Energy Co  vs.  ConocoPhillips

SM Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SM Energy Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, SM Energy is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

ConocoPhillips

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ConocoPhillips has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, ConocoPhillips is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with SM Energy and ConocoPhillips

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

The idea behind SM Energy Co and ConocoPhillips 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.