Correlation Between Phillips and Valero Energy

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

By analyzing existing cross correlation between Phillips 66 and Valero Energy, you can compare the effects of market volatilities on Phillips and Valero 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 Phillips with a short position of Valero Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Phillips and Valero Energy.

Diversification Opportunities for Phillips and Valero Energy

0.85

Correlation Coefficient

Phillips  Valero Energy

Very poor diversification

The 3 months correlation between Phillips and Valero is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Phillips 66 and Valero Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Valero Energy and Phillips 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 Phillips 66 are associated (or correlated) with Valero Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Valero Energy has no effect on the direction of Phillips i.e., Phillips and Valero Energy go up and down completely randomly.

Pair Corralation between Phillips and Valero Energy

Assuming the 90 days horizon Phillips 66 is expected to under-perform the Valero Energy. In addition to that, Phillips is 1.37 times more volatile than Valero Energy. It trades about -0.49 of its total potential returns per unit of risk. Valero Energy is currently generating about -0.56 per unit of volatility. If you would invest  13,346  in Valero Energy on September 24, 2024 and sell it today you would lose (1,946) from holding Valero Energy or give up 14.58% of portfolio value over 90 days.

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

Phillips 66  vs.  Valero Energy

Phillips 66

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Phillips 66 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Valero Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Valero Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Valero Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Phillips and Valero Energy

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

The idea behind Phillips 66 and Valero 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.