Correlation Between Timken and Diversified Energy

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

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

Diversification Opportunities for Timken and Diversified Energy

-0.68

Correlation Coefficient

Timken  Diversified Energy

Excellent diversification

The 3 months correlation between Timken and Diversified is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Timken Company and Diversified Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Energy and Timken 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 Timken Company are associated (or correlated) with Diversified Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Energy has no effect on the direction of Timken i.e., Timken and Diversified Energy go up and down completely randomly.

Pair Corralation between Timken and Diversified Energy

Considering the 90-day investment horizon Timken is expected to generate 10.23 times less return on investment than Diversified Energy. But when comparing it to its historical volatility, Timken Company is 2.12 times less risky than Diversified Energy. It trades about 0.07 of its potential returns per unit of risk. Diversified Energy is currently generating about 0.36 of returns per unit of risk over similar time horizon. If you would invest  1,263  in Diversified Energy on September 12, 2024 and sell it today you would earn a total of  287.00  from holding Diversified Energy or generate 22.72% return on investment over 90 days.

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

Timken Company  vs.  Diversified Energy

Timken Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Timken Company has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable forward-looking signals, Timken is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

Diversified Energy

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Energy are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating technical and fundamental indicators, Diversified Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Timken and Diversified Energy

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

The idea behind Timken Company and Diversified 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.