Correlation Between SM Energy and Vaalco Energy

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

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

Diversification Opportunities for SM Energy and Vaalco Energy

0.18

Correlation Coefficient

SM Energy  Vaalco Energy

Average diversification

The 3 months correlation between SM Energy and Vaalco is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding SM Energy Co and Vaalco Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vaalco Energy and SM Energy 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 SM Energy Co are associated (or correlated) with Vaalco Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vaalco Energy has no effect on the direction of SM Energy i.e., SM Energy and Vaalco Energy go up and down completely randomly.

Pair Corralation between SM Energy and Vaalco Energy

Allowing for the 90-day total investment horizon SM Energy Co is expected to generate 1.13 times more return on investment than Vaalco Energy. However, SM Energy is 1.13 times more volatile than Vaalco Energy. It trades about 0.02 of its potential returns per unit of risk. Vaalco Energy is currently generating about -0.08 per unit of risk. If you would invest  3,963  in SM Energy Co on September 16, 2024 and sell it today you would earn a total of  80.00  from holding SM Energy Co or generate 2.02% return on investment over 90 days.

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

SM Energy Co  vs.  Vaalco Energy

SM Energy

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SM Energy Co are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy primary indicators, SM Energy is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Vaalco Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vaalco Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with SM Energy and Vaalco Energy

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

The idea behind SM Energy Co and Vaalco 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.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.