Correlation Between North European and Permian Basin

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

By analyzing existing cross correlation between North European Oil and Permian Basin Royalty, you can compare the effects of market volatilities on North European and Permian Basin 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 North European with a short position of Permian Basin. Check out your portfolio center. Please also check ongoing floating volatility patterns of North European and Permian Basin.

Diversification Opportunities for North European and Permian Basin

-0.57

Correlation Coefficient

North European  Permian Basin

Excellent diversification

The 3 months correlation between North and Permian is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding North European Oil and Permian Basin Royalty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Permian Basin Royalty and North European 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 North European Oil are associated (or correlated) with Permian Basin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Permian Basin Royalty has no effect on the direction of North European i.e., North European and Permian Basin go up and down completely randomly.

Pair Corralation between North European and Permian Basin

Considering the 90-day investment horizon North European Oil is expected to under-perform the Permian Basin. In addition to that, North European is 1.25 times more volatile than Permian Basin Royalty. It trades about -0.12 of its total potential returns per unit of risk. Permian Basin Royalty is currently generating about 0.17 per unit of volatility. If you would invest  1,052  in Permian Basin Royalty on September 3, 2024 and sell it today you would earn a total of  300.00  from holding Permian Basin Royalty or generate 28.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

North European Oil  vs.  Permian Basin Royalty

North European Oil

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days North European Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Permian Basin Royalty

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Permian Basin Royalty are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental drivers, Permian Basin unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North European and Permian Basin

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

The idea behind North European Oil and Permian Basin Royalty 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.