Can any of the company-specific risk be diversified away by investing in both Exxon and Gitennes Exploration 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 Gitennes Exploration 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 Gitennes Exploration, you can compare the effects of market volatilities on Exxon and Gitennes Exploration 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 Gitennes Exploration. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Gitennes Exploration.
Diversification Opportunities for Exxon and Gitennes Exploration
The 3 months correlation between Exxon and Gitennes is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding EXXON MOBIL CDR and Gitennes Exploration in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gitennes Exploration 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 Gitennes Exploration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gitennes Exploration has no effect on the direction of Exxon i.e., Exxon and Gitennes Exploration go up and down completely randomly.
Pair Corralation between Exxon and Gitennes Exploration
Assuming the 90 days trading horizon Exxon is expected to generate 25.58 times less return on investment than Gitennes Exploration. But when comparing it to its historical volatility, EXXON MOBIL CDR is 29.67 times less risky than Gitennes Exploration. It trades about 0.12 of its potential returns per unit of risk. Gitennes Exploration is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest 2.00 in Gitennes Exploration on March 6, 2024 and sell it today you would lose (1.00) from holding Gitennes Exploration or give up 50.0% of portfolio value over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in EXXON MOBIL CDR are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal basic indicators, Exxon may actually be approaching a critical reversion point that can send shares even higher in July 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in Gitennes Exploration are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Gitennes Exploration showed solid returns over the last few months and may actually be approaching a breakup point.