Correlation Between SM Energy and Southwestern Energy

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

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

Diversification Opportunities for SM Energy and Southwestern Energy

0.97

Correlation Coefficient

SM Energy  Southwestern Energy

Almost no diversification

The 3 months correlation between SM Energy and Southwestern is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding SM Energy Co and Southwestern Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwestern Energy and SM 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 SM Energy Co are associated (or correlated) with Southwestern Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwestern Energy has no effect on the direction of SM Energy i.e., SM Energy and Southwestern Energy go up and down completely randomly.

Pair Corralation between SM Energy and Southwestern Energy

Allowing for the 90-day total investment horizon SM Energy is expected to generate 1.11 times less return on investment than Southwestern Energy. In addition to that, SM Energy is 1.2 times more volatile than Southwestern Energy. It trades about 0.11 of its total potential returns per unit of risk. Southwestern Energy is currently generating about 0.15 per unit of volatility. If you would invest  733.00  in Southwestern Energy on January 26, 2024 and sell it today you would earn a total of  26.00  from holding Southwestern Energy or generate 3.55% return on investment over 90 days.

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

SM Energy Co  vs.  Southwestern Energy

SM Energy

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in SM Energy Co are ranked lower than 23 (%) 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.

Southwestern Energy

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwestern Energy are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Southwestern Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with SM Energy and Southwestern Energy

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

The idea behind SM Energy Co and Southwestern Energy 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.