Correlation Between Empire Petroleum and MDM Permian

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

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

Diversification Opportunities for Empire Petroleum and MDM Permian

0.15

Correlation Coefficient

Empire Petroleum  MDM Permian

Average diversification

The 3 months correlation between Empire and MDM is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Empire Petroleum Corp and MDM Permian in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MDM Permian and Empire 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 Empire Petroleum Corp are associated (or correlated) with MDM Permian. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MDM Permian has no effect on the direction of Empire Petroleum i.e., Empire Petroleum and MDM Permian go up and down completely randomly.

Pair Corralation between Empire Petroleum and MDM Permian

Allowing for the 90-day total investment horizon Empire Petroleum is expected to generate 1.33 times less return on investment than MDM Permian. But when comparing it to its historical volatility, Empire Petroleum Corp is 3.47 times less risky than MDM Permian. It trades about 0.13 of its potential returns per unit of risk. MDM Permian is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1.10  in MDM Permian on September 16, 2024 and sell it today you would lose (0.10) from holding MDM Permian or give up 9.09% of portfolio value over 90 days.

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

Empire Petroleum Corp  vs.  MDM Permian

Empire Petroleum Corp

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Empire Petroleum Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, Empire Petroleum reported solid returns over the last few months and may actually be approaching a breakup point.

MDM Permian

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MDM Permian are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile primary indicators, MDM Permian reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Empire Petroleum and MDM Permian

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

The idea behind Empire Petroleum Corp and MDM Permian 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.