Correlation Between Woodside Petroleum and Devon Energy

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

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

Diversification Opportunities for Woodside Petroleum and Devon Energy

0.32

Correlation Coefficient

Woodside Petroleum  Devon Energy

Weak diversification

The 3 months correlation between Woodside and Devon is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Woodside Petroleum and Devon Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Devon Energy and Woodside Petroleum 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 Woodside Petroleum are associated (or correlated) with Devon Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Devon Energy has no effect on the direction of Woodside Petroleum i.e., Woodside Petroleum and Devon Energy go up and down completely randomly.

Pair Corralation between Woodside Petroleum and Devon Energy

Assuming the 90 days horizon Woodside Petroleum is expected to generate 3.71 times more return on investment than Devon Energy. However, Woodside Petroleum is 3.71 times more volatile than Devon Energy. It trades about 0.05 of its potential returns per unit of risk. Devon Energy is currently generating about 0.14 per unit of risk. If you would invest  1,408  in Woodside Petroleum on December 28, 2024 and sell it today you would earn a total of  77.00  from holding Woodside Petroleum or generate 5.47% return on investment over 90 days.

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

Woodside Petroleum  vs.  Devon Energy

Woodside Petroleum

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Woodside Petroleum are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, Woodside Petroleum reported solid returns over the last few months and may actually be approaching a breakup point.

Devon Energy

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Devon Energy are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Devon Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Woodside Petroleum and Devon Energy

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

The idea behind Woodside Petroleum and Devon Energy 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.