Correlation Between Telefonica and Exxon

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

By analyzing existing cross correlation between Telefonica SA ADR and Exxon Mobil Corp, you can compare the effects of market volatilities on Telefonica and Exxon 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 Telefonica with a short position of Exxon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Telefonica and Exxon.

Diversification Opportunities for Telefonica and Exxon

0.71

Correlation Coefficient

Telefonica  Exxon

Poor diversification

The 3 months correlation between Telefonica and Exxon is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Telefonica SA ADR and Exxon Mobil Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exxon Mobil Corp and Telefonica 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 Telefonica SA ADR are associated (or correlated) with Exxon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exxon Mobil Corp has no effect on the direction of Telefonica i.e., Telefonica and Exxon go up and down completely randomly.

Pair Corralation between Telefonica and Exxon

Considering the 90-day investment horizon Telefonica is expected to generate 4.92 times less return on investment than Exxon. But when comparing it to its historical volatility, Telefonica SA ADR is 1.17 times less risky than Exxon. It trades about 0.01 of its potential returns per unit of risk. Exxon Mobil Corp is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  8,412  in Exxon Mobil Corp on January 25, 2024 and sell it today you would earn a total of  3,693  from holding Exxon Mobil Corp or generate 43.9% return on investment over 90 days.

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

Telefonica SA ADR  vs.  Exxon Mobil Corp

Telefonica SA ADR

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Telefonica SA ADR are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating technical and fundamental indicators, Telefonica may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Exxon Mobil Corp

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil Corp are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting basic indicators, Exxon displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Telefonica and Exxon

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

The idea behind Telefonica SA ADR and Exxon Mobil Corp 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.