Correlation Between Tullow Oil and Occidental Petroleum

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

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

Diversification Opportunities for Tullow Oil and Occidental Petroleum

0.6

Correlation Coefficient

Tullow Oil  Occidental Petroleum

Poor diversification

The 3 months correlation between Tullow and Occidental is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Tullow Oil PLC and Occidental Petroleum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Occidental Petroleum and Tullow Oil 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 Tullow Oil PLC are associated (or correlated) with Occidental Petroleum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Occidental Petroleum has no effect on the direction of Tullow Oil i.e., Tullow Oil and Occidental Petroleum go up and down completely randomly.

Pair Corralation between Tullow Oil and Occidental Petroleum

Assuming the 90 days horizon Tullow Oil PLC is expected to under-perform the Occidental Petroleum. In addition to that, Tullow Oil is 5.3 times more volatile than Occidental Petroleum. It trades about -0.02 of its total potential returns per unit of risk. Occidental Petroleum is currently generating about 0.03 per unit of volatility. If you would invest  4,821  in Occidental Petroleum on December 29, 2024 and sell it today you would earn a total of  130.00  from holding Occidental Petroleum or generate 2.7% return on investment over 90 days.

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

Tullow Oil PLC  vs.  Occidental Petroleum

Tullow Oil PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tullow Oil PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Occidental Petroleum

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Occidental Petroleum are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Occidental Petroleum is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Tullow Oil and Occidental Petroleum

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

The idea behind Tullow Oil PLC and Occidental Petroleum 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.