Correlation Between Exxon and Alcoa Corp

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

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

Diversification Opportunities for Exxon and Alcoa Corp

0.89

Correlation Coefficient

Exxon  Alcoa Corp

Very poor diversification

The 3 months correlation between Exxon and Alcoa is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp and Exxon 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 Exxon Mobil Corp are associated (or correlated) with Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of Exxon i.e., Exxon and Alcoa Corp go up and down completely randomly.

Pair Corralation between Exxon and Alcoa Corp

Considering the 90-day investment horizon Exxon is expected to generate 2.7 times less return on investment than Alcoa Corp. But when comparing it to its historical volatility, Exxon Mobil Corp is 2.91 times less risky than Alcoa Corp. It trades about 0.3 of its potential returns per unit of risk. Alcoa Corp is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  3,186  in Alcoa Corp on January 24, 2024 and sell it today you would earn a total of  449.00  from holding Alcoa Corp or generate 14.09% return on investment over 90 days.

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

Exxon Mobil Corp  vs.  Alcoa Corp

Exxon Mobil Corp

Risk-Adjusted Performance

25 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil Corp are ranked lower than 25 (%) 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.

Alcoa Corp

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alcoa Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Alcoa Corp sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Exxon and Alcoa Corp

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

The idea behind Exxon Mobil Corp and Alcoa 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.

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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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.