Correlation Between Shell PLC and Ecopetrol

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

By analyzing existing cross correlation between Shell PLC ADR and Ecopetrol SA ADR, you can compare the effects of market volatilities on Shell PLC and Ecopetrol 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 Shell PLC with a short position of Ecopetrol. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shell PLC and Ecopetrol.

Diversification Opportunities for Shell PLC and Ecopetrol

0.7

Correlation Coefficient

Shell PLC  Ecopetrol

Poor diversification

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

Pair Corralation between Shell PLC and Ecopetrol

Given the investment horizon of 90 days Shell PLC ADR is expected to generate 0.7 times more return on investment than Ecopetrol. However, Shell PLC ADR is 1.42 times less risky than Ecopetrol. It trades about -0.1 of its potential returns per unit of risk. Ecopetrol SA ADR is currently generating about -0.16 per unit of risk. If you would invest  7,091  in Shell PLC ADR on August 30, 2024 and sell it today you would lose (600.00) from holding Shell PLC ADR or give up 8.46% of portfolio value over 90 days.

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

Shell PLC ADR  vs.  Ecopetrol SA ADR

Shell PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shell PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's technical and fundamental indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Ecopetrol SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ecopetrol SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in December 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Shell PLC and Ecopetrol

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

The idea behind Shell PLC ADR and Ecopetrol SA ADR 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.