Correlation Between Earthstone Energy and SM Energy

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

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

Diversification Opportunities for Earthstone Energy and SM Energy

0.47

Correlation Coefficient

Earthstone Energy  SM Energy

Very weak diversification

The 3 months correlation between Earthstone and SM Energy is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Earthstone Energy and SM Energy Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SM Energy and Earthstone Energy 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 Earthstone Energy are associated (or correlated) with SM Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SM Energy has no effect on the direction of Earthstone Energy i.e., Earthstone Energy and SM Energy go up and down completely randomly.

Pair Corralation between Earthstone Energy and SM Energy

If you would invest  4,269  in SM Energy Co on September 2, 2024 and sell it today you would earn a total of  250.00  from holding SM Energy Co or generate 5.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	1.56%
Values	Daily Returns

Earthstone Energy  vs.  SM Energy Co

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.

SM Energy

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in SM Energy Co are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady primary indicators, SM Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Earthstone Energy and SM Energy

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

The idea behind Earthstone Energy and SM Energy Co 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.