Correlation Between Epsilon Energy and SM Energy

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

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

Diversification Opportunities for Epsilon Energy and SM Energy

0.88

Correlation Coefficient

Epsilon Energy  SM Energy

Very poor diversification

The 3 months correlation between Epsilon and SM Energy is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Epsilon Energy and SM Energy Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SM Energy and Epsilon 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 Epsilon Energy are associated (or correlated) with SM Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SM Energy has no effect on the direction of Epsilon Energy i.e., Epsilon Energy and SM Energy go up and down completely randomly.

Pair Corralation between Epsilon Energy and SM Energy

Given the investment horizon of 90 days Epsilon Energy is expected to under-perform the SM Energy. But the stock apears to be less risky and, when comparing its historical volatility, Epsilon Energy is 1.45 times less risky than SM Energy. The stock trades about -0.01 of its potential returns per unit of risk. The SM Energy Co is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  3,336  in SM Energy Co on January 16, 2024 and sell it today you would earn a total of  1,706  from holding SM Energy Co or generate 51.14% return on investment over 90 days.

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

Epsilon Energy  vs.  SM Energy Co

Epsilon Energy

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Epsilon Energy are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Epsilon Energy may actually be approaching a critical reversion point that can send shares even higher in May 2024.

SM Energy

Risk-Adjusted Performance

28 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in SM Energy Co are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady primary indicators, SM Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Epsilon Energy and SM Energy

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

The idea behind Epsilon Energy and SM Energy Co 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.