Can any of the company-specific risk be diversified away by investing in both Exxon and Eastfield Resources 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 Eastfield Resources 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 Eastfield Resources, you can compare the effects of market volatilities on Exxon and Eastfield Resources 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 Eastfield Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Eastfield Resources.
Diversification Opportunities for Exxon and Eastfield Resources
The 3 months correlation between Exxon and Eastfield is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp and Eastfield Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastfield Resources 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 Eastfield Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastfield Resources has no effect on the direction of Exxon i.e., Exxon and Eastfield Resources go up and down completely randomly.
Pair Corralation between Exxon and Eastfield Resources
Considering the 90-day investment horizon Exxon Mobil Corp is expected to generate 0.07 times more return on investment than Eastfield Resources. However, Exxon Mobil Corp is 14.36 times less risky than Eastfield Resources. It trades about -0.09 of its potential returns per unit of risk. Eastfield Resources is currently generating about -0.03 per unit of risk. If you would invest 10,491 in Exxon Mobil Corp on September 5, 2023 and sell it today you would lose (192.00) from holding Exxon Mobil Corp or give up 1.83% of portfolio value over 90 days.
Over the last 90 days Exxon Mobil Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm insiders.
Compared to the overall equity markets, risk-adjusted returns on investments in Eastfield Resources are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Eastfield Resources reported solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Exxon and Eastfield Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Exxon position performs unexpectedly, Eastfield Resources 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 Eastfield Resources will offset losses from the drop in Eastfield Resources' long position.
The idea behind Exxon Mobil Corp and Eastfield 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.
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