Correlation Between Devon Energy and Northern Oil

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

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

Diversification Opportunities for Devon Energy and Northern Oil

0.98

Correlation Coefficient

Devon Energy  Northern Oil

Almost no diversification

The 3 months correlation between Devon and Northern is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Devon Energy and Northern Oil Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Oil Gas and Devon 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 Devon Energy are associated (or correlated) with Northern Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Oil Gas has no effect on the direction of Devon Energy i.e., Devon Energy and Northern Oil go up and down completely randomly.

Pair Corralation between Devon Energy and Northern Oil

Considering the 90-day investment horizon Devon Energy is expected to generate 2.14 times less return on investment than Northern Oil. But when comparing it to its historical volatility, Devon Energy is 1.11 times less risky than Northern Oil. It trades about 0.04 of its potential returns per unit of risk. Northern Oil Gas is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,066  in Northern Oil Gas on February 8, 2024 and sell it today you would earn a total of  1,006  from holding Northern Oil Gas or generate 32.81% return on investment over 90 days.

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

Devon Energy  vs.  Northern Oil Gas

Devon Energy

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Devon Energy are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Devon Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Northern Oil Gas

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Oil Gas are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Northern Oil reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Devon Energy and Northern Oil

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

The idea behind Devon Energy and Northern Oil Gas 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.