Correlation Between NorAm Drilling and BYD Company

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

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

Diversification Opportunities for NorAm Drilling and BYD Company

0.25

Correlation Coefficient

NorAm Drilling  BYD Company

Modest diversification

The 3 months correlation between NorAm and BYD is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding NorAm Drilling AS and BYD Company Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BYD Limited and NorAm Drilling 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 NorAm Drilling AS are associated (or correlated) with BYD Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BYD Limited has no effect on the direction of NorAm Drilling i.e., NorAm Drilling and BYD Company go up and down completely randomly.

Pair Corralation between NorAm Drilling and BYD Company

Assuming the 90 days horizon NorAm Drilling is expected to generate 1.21 times less return on investment than BYD Company. In addition to that, NorAm Drilling is 1.73 times more volatile than BYD Company Limited. It trades about 0.06 of its total potential returns per unit of risk. BYD Company Limited is currently generating about 0.13 per unit of volatility. If you would invest  2,764  in BYD Company Limited on September 12, 2024 and sell it today you would earn a total of  662.00  from holding BYD Company Limited or generate 23.95% return on investment over 90 days.

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

NorAm Drilling AS  vs.  BYD Company Limited

NorAm Drilling AS

Risk-Adjusted Performance

5 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NorAm Drilling AS are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, NorAm Drilling reported solid returns over the last few months and may actually be approaching a breakup point.

BYD Limited

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BYD Company Limited are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, BYD Company reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NorAm Drilling and BYD Company

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

The idea behind NorAm Drilling AS and BYD Company Limited 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.