Correlation Between BP PLC and Natural Resource

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

By analyzing existing cross correlation between BP PLC ADR and Natural Resource Partners, you can compare the effects of market volatilities on BP PLC and Natural Resource 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 BP PLC with a short position of Natural Resource. Check out your portfolio center. Please also check ongoing floating volatility patterns of BP PLC and Natural Resource.

Diversification Opportunities for BP PLC and Natural Resource

-0.63

Correlation Coefficient

BP PLC  Natural Resource

Excellent diversification

The 3 months correlation between BP PLC and Natural is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding BP PLC ADR and Natural Resource Partners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natural Resource Partners and BP PLC 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 BP PLC ADR are associated (or correlated) with Natural Resource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natural Resource Partners has no effect on the direction of BP PLC i.e., BP PLC and Natural Resource go up and down completely randomly.

Pair Corralation between BP PLC and Natural Resource

Allowing for the 90-day total investment horizon BP PLC ADR is expected to under-perform the Natural Resource. But the stock apears to be less risky and, when comparing its historical volatility, BP PLC ADR is 1.19 times less risky than Natural Resource. The stock trades about -0.13 of its potential returns per unit of risk. The Natural Resource Partners is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  8,869  in Natural Resource Partners on August 30, 2024 and sell it today you would earn a total of  2,081  from holding Natural Resource Partners or generate 23.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

BP PLC ADR  vs.  Natural Resource Partners

BP PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BP PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Even with unsteady performance in the last few months, the Stock's basic indicators remain relatively invariable which may send shares a bit higher in December 2024. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

Natural Resource Partners

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Resource Partners are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile basic indicators, Natural Resource reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BP PLC and Natural Resource

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

The idea behind BP PLC ADR and Natural Resource Partners 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.