Can any of the company-specific risk be diversified away by investing in both Exxon and Meta Platforms 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 Meta Platforms 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 Meta Platforms, you can compare the effects of market volatilities on Exxon and Meta Platforms 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 Meta Platforms. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Meta Platforms.
Diversification Opportunities for Exxon and Meta Platforms
The 3 months correlation between Exxon and Meta is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp and Meta Platforms in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meta Platforms 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 Meta Platforms. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meta Platforms has no effect on the direction of Exxon i.e., Exxon and Meta Platforms go up and down completely randomly.
Considering the 90-day investment horizon Exxon Mobil Corp is expected to under-perform the Meta Platforms. But the stock apears to be less risky and, when comparing its historical volatility, Exxon Mobil Corp is 1.2 times less risky than Meta Platforms. The stock trades about -0.22 of its potential returns per unit of risk. The Meta Platforms is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest 31,087 in Meta Platforms on September 3, 2023 and sell it today you would earn a total of 1,395 from holding Meta Platforms or generate 4.49% return on investment 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 unsteady 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 Meta Platforms are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Meta Platforms may actually be approaching a critical reversion point that can send shares even higher in January 2024.
The main advantage of trading using opposite Exxon and Meta Platforms positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Exxon position performs unexpectedly, Meta Platforms 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 Meta Platforms will offset losses from the drop in Meta Platforms' long position.
The idea behind Exxon Mobil Corp and Meta Platforms 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.
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