Correlation Between Petrleo Brasileiro and Ecopetrol

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

By analyzing existing cross correlation between Petrleo Brasileiro SA and Ecopetrol SA ADR, you can compare the effects of market volatilities on Petrleo Brasileiro and Ecopetrol 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 Petrleo Brasileiro with a short position of Ecopetrol. Check out your portfolio center. Please also check ongoing floating volatility patterns of Petrleo Brasileiro and Ecopetrol.

Diversification Opportunities for Petrleo Brasileiro and Ecopetrol

0.23

Correlation Coefficient

Petrleo Brasileiro  Ecopetrol

Modest diversification

The 3 months correlation between Petrleo and Ecopetrol is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Petrleo Brasileiro SA and Ecopetrol SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ecopetrol SA ADR and Petrleo Brasileiro 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 Petrleo Brasileiro SA are associated (or correlated) with Ecopetrol. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ecopetrol SA ADR has no effect on the direction of Petrleo Brasileiro i.e., Petrleo Brasileiro and Ecopetrol go up and down completely randomly.

Pair Corralation between Petrleo Brasileiro and Ecopetrol

Assuming the 90 days horizon Petrleo Brasileiro SA is expected to generate 0.88 times more return on investment than Ecopetrol. However, Petrleo Brasileiro SA is 1.14 times less risky than Ecopetrol. It trades about 0.27 of its potential returns per unit of risk. Ecopetrol SA ADR is currently generating about 0.06 per unit of risk. If you would invest  1,469  in Petrleo Brasileiro SA on February 1, 2024 and sell it today you would earn a total of  143.00  from holding Petrleo Brasileiro SA or generate 9.73% return on investment over 90 days.

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

Petrleo Brasileiro SA  vs.  Ecopetrol SA ADR

Petrleo Brasileiro

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Petrleo Brasileiro SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Petrleo Brasileiro is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Ecopetrol SA ADR

Risk-Adjusted Performance

2 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ecopetrol SA ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Ecopetrol is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Petrleo Brasileiro and Ecopetrol

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

The idea behind Petrleo Brasileiro SA and Ecopetrol SA ADR 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.