Can any of the company-specific risk be diversified away by investing in both Select Energy and CHINA CH 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 Select Energy and CHINA CH into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Select Energy Services and CHINA CH VENT, you can compare the effects of market volatilities on Select Energy and CHINA CH 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 Select Energy with a short position of CHINA CH. Check out your portfolio center. Please also check ongoing floating volatility patterns of Select Energy and CHINA CH.
Diversification Opportunities for Select Energy and CHINA CH
The 3 months correlation between Select and CHINA is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Select Energy Services and CHINA CH VENT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CHINA CH VENT and Select Energy 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 Select Energy Services are associated (or correlated) with CHINA CH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CHINA CH VENT has no effect on the direction of Select Energy i.e., Select Energy and CHINA CH go up and down completely randomly.
Pair Corralation between Select Energy and CHINA CH
Assuming the 90 days trading horizon Select Energy Services is expected to generate 0.55 times more return on investment than CHINA CH. However, Select Energy Services is 1.8 times less risky than CHINA CH. It trades about 0.5 of its potential returns per unit of risk. CHINA CH VENT is currently generating about 0.13 per unit of risk. If you would invest 858.00 in Select Energy Services on March 6, 2024 and sell it today you would earn a total of 127.00 from holding Select Energy Services or generate 14.8% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Select Energy Services are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Select Energy reported solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days CHINA CH VENT has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.