Correlation Between Natural Resource and Peabody Energy

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

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

Diversification Opportunities for Natural Resource and Peabody Energy

0.7

Correlation Coefficient

Natural Resource  Peabody Energy

Poor diversification

The 3 months correlation between Natural and Peabody is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Natural Resource Partners and Peabody Energy Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Peabody Energy Corp and Natural Resource 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 Natural Resource Partners are associated (or correlated) with Peabody Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Peabody Energy Corp has no effect on the direction of Natural Resource i.e., Natural Resource and Peabody Energy go up and down completely randomly.

Pair Corralation between Natural Resource and Peabody Energy

Considering the 90-day investment horizon Natural Resource Partners is expected to generate 0.66 times more return on investment than Peabody Energy. However, Natural Resource Partners is 1.51 times less risky than Peabody Energy. It trades about 0.23 of its potential returns per unit of risk. Peabody Energy Corp is currently generating about 0.06 per unit of risk. If you would invest  8,520  in Natural Resource Partners on September 5, 2024 and sell it today you would earn a total of  2,501  from holding Natural Resource Partners or generate 29.35% return on investment over 90 days.

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

Natural Resource Partners  vs.  Peabody Energy Corp

Natural Resource Partners

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Resource Partners are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile basic indicators, Natural Resource reported solid returns over the last few months and may actually be approaching a breakup point.

Peabody Energy Corp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Peabody Energy Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Peabody Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Natural Resource and Peabody Energy

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

The idea behind Natural Resource Partners and Peabody Energy Corp 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.

Check out your portfolio center.

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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.