Correlation Between STEP Energy and Source Energy

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

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

Diversification Opportunities for STEP Energy and Source Energy

0.85

Correlation Coefficient

STEP Energy  Source Energy

Very poor diversification

The 3 months correlation between STEP and Source is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding STEP Energy Services and Source Energy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source Energy Services and STEP 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 STEP Energy Services are associated (or correlated) with Source Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source Energy Services has no effect on the direction of STEP Energy i.e., STEP Energy and Source Energy go up and down completely randomly.

Pair Corralation between STEP Energy and Source Energy

Assuming the 90 days trading horizon STEP Energy Services is expected to generate 1.58 times more return on investment than Source Energy. However, STEP Energy is 1.58 times more volatile than Source Energy Services. It trades about -0.11 of its potential returns per unit of risk. Source Energy Services is currently generating about -0.23 per unit of risk. If you would invest  505.00  in STEP Energy Services on October 10, 2024 and sell it today you would lose (52.00) from holding STEP Energy Services or give up 10.3% of portfolio value over 90 days.

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

STEP Energy Services  vs.  Source Energy Services

STEP Energy Services

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in STEP Energy Services are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, STEP Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Source Energy Services

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Source Energy Services are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Source Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with STEP Energy and Source Energy

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

The idea behind STEP Energy Services and Source Energy Services 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.