Can any of the company-specific risk be diversified away by investing in both TomCo Energy and Canadian Natural 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 TomCo Energy and Canadian Natural into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between TomCo Energy Plc and Canadian Natural Resources, you can compare the effects of market volatilities on TomCo Energy and Canadian Natural 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 TomCo Energy with a short position of Canadian Natural. Check out your portfolio center. Please also check ongoing floating volatility patterns of TomCo Energy and Canadian Natural.
Diversification Opportunities for TomCo Energy and Canadian Natural
The 3 months correlation between TomCo and Canadian is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding TomCo Energy Plc and Canadian Natural Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Natural Res and TomCo 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 TomCo Energy Plc are associated (or correlated) with Canadian Natural. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Natural Res has no effect on the direction of TomCo Energy i.e., TomCo Energy and Canadian Natural go up and down completely randomly.
Pair Corralation between TomCo Energy and Canadian Natural
Assuming the 90 days horizon TomCo Energy Plc is expected to generate 105.24 times more return on investment than Canadian Natural. However, TomCo Energy is 105.24 times more volatile than Canadian Natural Resources. It trades about 0.16 of its potential returns per unit of risk. Canadian Natural Resources is currently generating about 0.12 per unit of risk. If you would invest 0.08 in TomCo Energy Plc on July 2, 2023 and sell it today you would earn a total of 2.31 from holding TomCo Energy Plc or generate 2887.5% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in TomCo Energy Plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, TomCo Energy reported 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 Canadian Natural Resources are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Canadian Natural reported solid returns over the last few months and may actually be approaching a breakup point.
TomCo Energy and Canadian Natural Volatility Contrast
Predicted Return Density
Pair Trading with TomCo Energy and Canadian Natural
The main advantage of trading using opposite TomCo Energy and Canadian Natural positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if TomCo Energy position performs unexpectedly, Canadian Natural 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 Canadian Natural will offset losses from the drop in Canadian Natural's long position.
The idea behind TomCo Energy Plc and Canadian Natural Resources 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.
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