Can any of the company-specific risk be diversified away by investing in both Enservco and Halliburton 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 Enservco and Halliburton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Enservco Co and Halliburton, you can compare the effects of market volatilities on Enservco and Halliburton 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 Enservco with a short position of Halliburton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Enservco and Halliburton.
Diversification Opportunities for Enservco and Halliburton
The 3 months correlation between Enservco and Halliburton is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Enservco Co and Halliburton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Halliburton and Enservco 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 Enservco Co are associated (or correlated) with Halliburton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Halliburton has no effect on the direction of Enservco i.e., Enservco and Halliburton go up and down completely randomly.
Given the investment horizon of 90 days Enservco is expected to generate 1.47 times less return on investment than Halliburton. In addition to that, Enservco is 3.21 times more volatile than Halliburton. It trades about 0.01 of its total potential returns per unit of risk. Halliburton is currently generating about 0.05 per unit of volatility. If you would invest 2,397 in Halliburton on July 2, 2023 and sell it today you would earn a total of 1,653 from holding Halliburton or generate 68.96% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Enservco Co are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Enservco showed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Halliburton are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite quite abnormal basic indicators, Halliburton disclosed solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Enservco and Halliburton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Enservco position performs unexpectedly, Halliburton 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 Halliburton will offset losses from the drop in Halliburton's long position.
The idea behind Enservco Co and Halliburton 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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