Correlation Between Africa Oil and FEC Resources

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

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

Diversification Opportunities for Africa Oil and FEC Resources

-0.12

Correlation Coefficient

Africa Oil  FEC Resources

Good diversification

The 3 months correlation between Africa and FEC is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Africa Oil Corp and FEC Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FEC Resources and Africa Oil 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 Africa Oil Corp are associated (or correlated) with FEC Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FEC Resources has no effect on the direction of Africa Oil i.e., Africa Oil and FEC Resources go up and down completely randomly.

Pair Corralation between Africa Oil and FEC Resources

Assuming the 90 days horizon Africa Oil is expected to generate 69.67 times less return on investment than FEC Resources. But when comparing it to its historical volatility, Africa Oil Corp is 10.82 times less risky than FEC Resources. It trades about 0.01 of its potential returns per unit of risk. FEC Resources is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.17  in FEC Resources on September 18, 2024 and sell it today you would lose (0.01) from holding FEC Resources or give up 5.88% of portfolio value over 90 days.

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

Africa Oil Corp  vs.  FEC Resources

Africa Oil Corp

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Africa Oil Corp are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Africa Oil is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

FEC Resources

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in FEC Resources are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, FEC Resources reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Africa Oil and FEC Resources

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

The idea behind Africa Oil Corp and FEC 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.

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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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.