Correlation Between Prairie Provident and Sound Energy

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

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

Diversification Opportunities for Prairie Provident and Sound Energy

0.32

Correlation Coefficient

Prairie Provident  Sound Energy

Weak diversification

The 3 months correlation between Prairie and Sound is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Prairie Provident Resources and Sound Energy plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sound Energy plc and Prairie Provident 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 Prairie Provident Resources are associated (or correlated) with Sound Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sound Energy plc has no effect on the direction of Prairie Provident i.e., Prairie Provident and Sound Energy go up and down completely randomly.

Pair Corralation between Prairie Provident and Sound Energy

Assuming the 90 days horizon Prairie Provident Resources is expected to generate 1.37 times more return on investment than Sound Energy. However, Prairie Provident is 1.37 times more volatile than Sound Energy plc. It trades about 0.02 of its potential returns per unit of risk. Sound Energy plc is currently generating about -0.12 per unit of risk. If you would invest  3.00  in Prairie Provident Resources on September 5, 2024 and sell it today you would lose (0.87) from holding Prairie Provident Resources or give up 29.0% of portfolio value over 90 days.

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

Prairie Provident Resources  vs.  Sound Energy plc

Prairie Provident

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Prairie Provident Resources are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly conflicting basic indicators, Prairie Provident reported solid returns over the last few months and may actually be approaching a breakup point.

Sound Energy plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sound Energy plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Prairie Provident and Sound Energy

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

The idea behind Prairie Provident Resources and Sound Energy plc 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.