Correlation Between WATSCO INC and NorAm Drilling

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

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

Diversification Opportunities for WATSCO INC and NorAm Drilling

0.27

Correlation Coefficient

WATSCO INC  NorAm Drilling

Modest diversification

The 3 months correlation between WATSCO and NorAm is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding WATSCO INC B and NorAm Drilling AS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NorAm Drilling AS and WATSCO INC 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 WATSCO INC B are associated (or correlated) with NorAm Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NorAm Drilling AS has no effect on the direction of WATSCO INC i.e., WATSCO INC and NorAm Drilling go up and down completely randomly.

Pair Corralation between WATSCO INC and NorAm Drilling

Assuming the 90 days trading horizon WATSCO INC is expected to generate 5.36 times less return on investment than NorAm Drilling. But when comparing it to its historical volatility, WATSCO INC B is 4.86 times less risky than NorAm Drilling. It trades about 0.06 of its potential returns per unit of risk. NorAm Drilling AS is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  99.00  in NorAm Drilling AS on September 2, 2024 and sell it today you would earn a total of  191.00  from holding NorAm Drilling AS or generate 192.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

WATSCO INC B  vs.  NorAm Drilling AS

WATSCO INC B

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days WATSCO INC B has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, WATSCO INC is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

NorAm Drilling AS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NorAm Drilling AS has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, NorAm Drilling is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with WATSCO INC and NorAm Drilling

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

The idea behind WATSCO INC B and NorAm Drilling AS 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.