Correlation Between Exxon and Verizon Communications

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

By analyzing existing cross correlation between EXXON MOBIL CDR and Verizon Communications CDR, you can compare the effects of market volatilities on Exxon and Verizon Communications 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 Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Verizon Communications.

Diversification Opportunities for Exxon and Verizon Communications

-0.03

Correlation Coefficient

Exxon  Verizon Communications

Good diversification

The 3 months correlation between Exxon and Verizon is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding EXXON MOBIL CDR and Verizon Communications CDR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 CDR are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Exxon i.e., Exxon and Verizon Communications go up and down completely randomly.

Pair Corralation between Exxon and Verizon Communications

Assuming the 90 days trading horizon Exxon is expected to generate 1.81 times less return on investment than Verizon Communications. But when comparing it to its historical volatility, EXXON MOBIL CDR is 1.0 times less risky than Verizon Communications. It trades about 0.05 of its potential returns per unit of risk. Verizon Communications CDR is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,791  in Verizon Communications CDR on September 4, 2024 and sell it today you would earn a total of  124.00  from holding Verizon Communications CDR or generate 6.92% return on investment over 90 days.

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

EXXON MOBIL CDR  vs.  Verizon Communications CDR

EXXON MOBIL CDR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in EXXON MOBIL CDR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Exxon is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Verizon Communications

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications CDR are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal basic indicators, Verizon Communications may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Exxon and Verizon Communications

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

The idea behind EXXON MOBIL CDR and Verizon Communications CDR 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.