Can any of the company-specific risk be diversified away by investing in both Plains All and Shell 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 Plains All and Shell PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Plains All American and Shell PLC, you can compare the effects of market volatilities on Plains All and Shell 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 Plains All with a short position of Shell PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Plains All and Shell PLC.
Diversification Opportunities for Plains All and Shell PLC
The 3 months correlation between Plains and Shell is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Plains All American and Shell PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shell PLC and Plains All 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 Plains All American are associated (or correlated) with Shell PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shell PLC has no effect on the direction of Plains All i.e., Plains All and Shell PLC go up and down completely randomly.
Considering the 90-day investment horizon Plains All American is expected to under-perform the Shell PLC. But the stock apears to be less risky and, when comparing its historical volatility, Plains All American is 2.37 times less risky than Shell PLC. The stock trades about -0.21 of its potential returns per unit of risk. The Shell PLC is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest 3,610 in Shell PLC on March 6, 2024 and sell it today you would lose (125.00) from holding Shell PLC or give up 3.46% of portfolio value over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Plains All American are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Plains All is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Shell PLC are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating basic indicators, Shell PLC may actually be approaching a critical reversion point that can send shares even higher in July 2024.