Correlation Between Vanguard Energy and Oil Equipment

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

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

Diversification Opportunities for Vanguard Energy and Oil Equipment

0.96

Correlation Coefficient

Vanguard Energy  Oil Equipment

Almost no diversification

The 3 months correlation between Vanguard and Oil is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Energy Fund and Oil Equipment Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Oil Equipment Services and Vanguard 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 Vanguard Energy Fund are associated (or correlated) with Oil Equipment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Oil Equipment Services has no effect on the direction of Vanguard Energy i.e., Vanguard Energy and Oil Equipment go up and down completely randomly.

Pair Corralation between Vanguard Energy and Oil Equipment

Assuming the 90 days horizon Vanguard Energy is expected to generate 1.48 times less return on investment than Oil Equipment. But when comparing it to its historical volatility, Vanguard Energy Fund is 2.39 times less risky than Oil Equipment. It trades about 0.2 of its potential returns per unit of risk. Oil Equipment Services is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  9,468  in Oil Equipment Services on January 20, 2024 and sell it today you would earn a total of  1,542  from holding Oil Equipment Services or generate 16.29% return on investment over 90 days.

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

Vanguard Energy Fund  vs.  Oil Equipment Services

Vanguard Energy

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Energy may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Oil Equipment Services

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Oil Equipment Services are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Oil Equipment showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Energy and Oil Equipment

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

The idea behind Vanguard Energy Fund and Oil Equipment Services 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.