Correlation Between Exxon and Prudential Financial

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

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

Diversification Opportunities for Exxon and Prudential Financial

0.46

Correlation Coefficient

Exxon  Prudential Financial

Very weak diversification

The 3 months correlation between Exxon and Prudential is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil and Prudential Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Financial and Exxon 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 Exxon Mobil are associated (or correlated) with Prudential Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Financial has no effect on the direction of Exxon i.e., Exxon and Prudential Financial go up and down completely randomly.

Pair Corralation between Exxon and Prudential Financial

Assuming the 90 days trading horizon Exxon is expected to generate 1.97 times less return on investment than Prudential Financial. But when comparing it to its historical volatility, Exxon Mobil is 1.12 times less risky than Prudential Financial. It trades about 0.1 of its potential returns per unit of risk. Prudential Financial is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  199,243  in Prudential Financial on December 22, 2024 and sell it today you would earn a total of  44,757  from holding Prudential Financial or generate 22.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Exxon Mobil  vs.  Prudential Financial

Exxon Mobil

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak primary indicators, Exxon may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Prudential Financial

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Prudential Financial showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Exxon and Prudential Financial

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

The idea behind Exxon Mobil and Prudential Financial 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.