Correlation Between NorAm Drilling and IMPERIAL TOBACCO

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

By analyzing existing cross correlation between NorAm Drilling AS and IMPERIAL TOBACCO , you can compare the effects of market volatilities on NorAm Drilling and IMPERIAL TOBACCO 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 NorAm Drilling with a short position of IMPERIAL TOBACCO. Check out your portfolio center. Please also check ongoing floating volatility patterns of NorAm Drilling and IMPERIAL TOBACCO.

Diversification Opportunities for NorAm Drilling and IMPERIAL TOBACCO

0.25

Correlation Coefficient

NorAm Drilling  IMPERIAL TOBACCO

Modest diversification

The 3 months correlation between NorAm and IMPERIAL is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding NorAm Drilling AS and IMPERIAL TOBACCO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IMPERIAL TOBACCO and NorAm Drilling 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 NorAm Drilling AS are associated (or correlated) with IMPERIAL TOBACCO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IMPERIAL TOBACCO has no effect on the direction of NorAm Drilling i.e., NorAm Drilling and IMPERIAL TOBACCO go up and down completely randomly.

Pair Corralation between NorAm Drilling and IMPERIAL TOBACCO

Assuming the 90 days trading horizon NorAm Drilling AS is expected to generate 3.87 times more return on investment than IMPERIAL TOBACCO. However, NorAm Drilling is 3.87 times more volatile than IMPERIAL TOBACCO . It trades about 0.17 of its potential returns per unit of risk. IMPERIAL TOBACCO is currently generating about 0.23 per unit of risk. If you would invest  225.00  in NorAm Drilling AS on October 25, 2024 and sell it today you would earn a total of  91.00  from holding NorAm Drilling AS or generate 40.44% return on investment over 90 days.

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

NorAm Drilling AS  vs.  IMPERIAL TOBACCO

NorAm Drilling AS

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in NorAm Drilling AS are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, NorAm Drilling unveiled solid returns over the last few months and may actually be approaching a breakup point.

IMPERIAL TOBACCO

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in IMPERIAL TOBACCO are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental drivers, IMPERIAL TOBACCO unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NorAm Drilling and IMPERIAL TOBACCO

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

The idea behind NorAm Drilling AS and IMPERIAL TOBACCO 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.

Check out your portfolio center.

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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.