Correlation Between Houston American and Earthstone Energy

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

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

Diversification Opportunities for Houston American and Earthstone Energy

-0.13

Correlation Coefficient

Houston American  Earthstone Energy

Good diversification

The 3 months correlation between Houston and Earthstone is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Houston American Energy and Earthstone Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Earthstone Energy and Houston American 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 Houston American Energy 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 Houston American i.e., Houston American and Earthstone Energy go up and down completely randomly.

Pair Corralation between Houston American and Earthstone Energy

Given the investment horizon of 90 days Houston American Energy is expected to under-perform the Earthstone Energy. In addition to that, Houston American is 1.61 times more volatile than Earthstone Energy. It trades about -0.01 of its total potential returns per unit of risk. Earthstone Energy is currently generating about 0.03 per unit of volatility. If you would invest  1,444  in Earthstone Energy on September 16, 2024 and sell it today you would earn a total of  88.00  from holding Earthstone Energy or generate 6.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	29.03%
Values	Daily Returns

Houston American Energy  vs.  Earthstone Energy

Houston American Energy

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Houston American Energy are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Houston American sustained solid returns over the last few months and may actually be approaching a breakup point.

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 Houston American and Earthstone Energy

The main advantage of trading using opposite Houston American and Earthstone Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Houston American 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 Houston American Energy 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 Transaction History module to view history of all your transactions and understand their impact on performance.