Correlation Between Frontline and Subsea 7
Can any of the company-specific risk be diversified away by investing in both Frontline and Subsea 7 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 Frontline and Subsea 7 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Frontline and Subsea 7 SA, you can compare the effects of market volatilities on Frontline and Subsea 7 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 Frontline with a short position of Subsea 7. Check out your portfolio center. Please also check ongoing floating volatility patterns of Frontline and Subsea 7.
Diversification Opportunities for Frontline and Subsea 7
Modest diversification
The 3 months correlation between Frontline and Subsea is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Frontline and Subsea 7 SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Subsea 7 SA and Frontline 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 Frontline are associated (or correlated) with Subsea 7. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Subsea 7 SA has no effect on the direction of Frontline i.e., Frontline and Subsea 7 go up and down completely randomly.
Pair Corralation between Frontline and Subsea 7
Assuming the 90 days trading horizon Frontline is expected to generate 1.5 times less return on investment than Subsea 7. In addition to that, Frontline is 1.34 times more volatile than Subsea 7 SA. It trades about 0.04 of its total potential returns per unit of risk. Subsea 7 SA is currently generating about 0.08 per unit of volatility. If you would invest 14,312 in Subsea 7 SA on August 25, 2024 and sell it today you would earn a total of 4,198 from holding Subsea 7 SA or generate 29.33% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Frontline vs. Subsea 7 SA
Performance |
| Timeline |
| Frontline |
| Subsea 7 SA |
Frontline and Subsea 7 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Frontline and Subsea 7
The main advantage of trading using opposite Frontline and Subsea 7 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Frontline position performs unexpectedly, Subsea 7 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 Subsea 7 will offset losses from the drop in Subsea 7's long position.The idea behind Frontline and Subsea 7 SA 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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