Correlation Between Callon Petroleum and Earthstone Energy

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

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

Diversification Opportunities for Callon Petroleum and Earthstone Energy

0.84

Correlation Coefficient

Callon Petroleum  Earthstone Energy

Very poor diversification

The 3 months correlation between Callon and Earthstone is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Callon Petroleum and Earthstone Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Earthstone Energy and Callon Petroleum 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 Callon Petroleum are associated (or correlated) with Earthstone Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Earthstone Energy has no effect on the direction of Callon Petroleum i.e., Callon Petroleum and Earthstone Energy go up and down completely randomly.

Pair Corralation between Callon Petroleum and Earthstone Energy

Considering the 90-day investment horizon Callon Petroleum is expected to generate 2.67 times less return on investment than Earthstone Energy. In addition to that, Callon Petroleum is 1.04 times more volatile than Earthstone Energy. It trades about 0.02 of its total potential returns per unit of risk. Earthstone Energy is currently generating about 0.05 per unit of volatility. If you would invest  1,315  in Earthstone Energy on September 2, 2024 and sell it today you would earn a total of  217.00  from holding Earthstone Energy or generate 16.5% return on investment over 90 days.

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

Callon Petroleum  vs.  Earthstone Energy

Callon Petroleum

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Callon Petroleum has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Callon Petroleum is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Earthstone Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Earthstone Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Earthstone Energy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Callon Petroleum and Earthstone Energy

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

The idea behind Callon Petroleum and Earthstone Energy 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.