Correlation Between Ecopetrol and Petróleo Brasileiro

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

By analyzing existing cross correlation between Ecopetrol SA ADR and Petrleo Brasileiro SA, you can compare the effects of market volatilities on Ecopetrol and Petróleo Brasileiro 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 Ecopetrol with a short position of Petróleo Brasileiro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ecopetrol and Petróleo Brasileiro.

Diversification Opportunities for Ecopetrol and Petróleo Brasileiro

0.85

Correlation Coefficient

Ecopetrol  Petróleo Brasileiro

Very poor diversification

The 3 months correlation between Ecopetrol and Petróleo is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Ecopetrol SA ADR and Petrleo Brasileiro SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Petróleo Brasileiro and Ecopetrol 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 Ecopetrol SA ADR are associated (or correlated) with Petróleo Brasileiro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Petróleo Brasileiro has no effect on the direction of Ecopetrol i.e., Ecopetrol and Petróleo Brasileiro go up and down completely randomly.

Pair Corralation between Ecopetrol and Petróleo Brasileiro

Allowing for the 90-day total investment horizon Ecopetrol SA ADR is expected to under-perform the Petróleo Brasileiro. In addition to that, Ecopetrol is 1.26 times more volatile than Petrleo Brasileiro SA. It trades about -0.16 of its total potential returns per unit of risk. Petrleo Brasileiro SA is currently generating about -0.05 per unit of volatility. If you would invest  1,394  in Petrleo Brasileiro SA on August 30, 2024 and sell it today you would lose (79.00) from holding Petrleo Brasileiro SA or give up 5.67% of portfolio value over 90 days.

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

Ecopetrol SA ADR  vs.  Petrleo Brasileiro SA

Ecopetrol SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ecopetrol SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in December 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Petróleo Brasileiro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Petrleo Brasileiro SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Petróleo Brasileiro is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Ecopetrol and Petróleo Brasileiro

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

The idea behind Ecopetrol SA ADR and Petrleo Brasileiro SA 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.