Correlation Between Exxon and BP Plc
Can any of the company-specific risk be diversified away by investing in both Exxon and BP Plc 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 Exxon and BP Plc into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Exxon Mobil and BP plc, you can compare the effects of market volatilities on Exxon and BP Plc 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 Exxon with a short position of BP Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and BP Plc.
Diversification Opportunities for Exxon and BP Plc
Very good diversification
The 3 months correlation between Exxon and BPN is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil and BP plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP plc and Exxon 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 Exxon Mobil are associated (or correlated) with BP Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP plc has no effect on the direction of Exxon i.e., Exxon and BP Plc go up and down completely randomly.
Pair Corralation between Exxon and BP Plc
Assuming the 90 days trading horizon Exxon Mobil is expected to generate 2.45 times more return on investment than BP Plc. However, Exxon is 2.45 times more volatile than BP plc. It trades about 0.11 of its potential returns per unit of risk. BP plc is currently generating about 0.17 per unit of risk. If you would invest 233,827 in Exxon Mobil on August 30, 2024 and sell it today you would earn a total of 9,073 from holding Exxon Mobil or generate 3.88% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 95.45% |
| Values | Daily Returns |
Exxon Mobil vs. BP plc
Performance |
| Timeline |
| Exxon Mobil |
| BP plc |
Exxon and BP Plc Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Exxon and BP Plc
The main advantage of trading using opposite Exxon and BP Plc positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Exxon position performs unexpectedly, BP Plc 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 BP Plc will offset losses from the drop in BP Plc's long position.The idea behind Exxon Mobil and BP plc 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.| BP Plc vs. Lloyds Banking Group | BP Plc vs. Martin Marietta Materials | BP Plc vs. Grupo Sports World | BP Plc vs. KB Home |
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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.
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