Correlation Between Permian Basin and Cool

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

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

Diversification Opportunities for Permian Basin and Cool

-0.48

Correlation Coefficient

Permian Basin  Cool

Very good diversification

The 3 months correlation between Permian and Cool is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Permian Basin Royalty and Cool Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cool Company and Permian Basin 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 Permian Basin Royalty are associated (or correlated) with Cool. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cool Company has no effect on the direction of Permian Basin i.e., Permian Basin and Cool go up and down completely randomly.

Pair Corralation between Permian Basin and Cool

Considering the 90-day investment horizon Permian Basin Royalty is expected to generate 0.99 times more return on investment than Cool. However, Permian Basin Royalty is 1.01 times less risky than Cool. It trades about 0.06 of its potential returns per unit of risk. Cool Company is currently generating about -0.07 per unit of risk. If you would invest  1,167  in Permian Basin Royalty on September 3, 2024 and sell it today you would earn a total of  185.00  from holding Permian Basin Royalty or generate 15.85% return on investment over 90 days.

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

Permian Basin Royalty  vs.  Cool Company

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.

Cool Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cool Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's fundamental indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Permian Basin and Cool

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

The idea behind Permian Basin Royalty and Cool Company 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.