Can any of the company-specific risk be diversified away by investing in both Subsea 7 and PGS ASA 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 Subsea 7 and PGS ASA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Subsea 7 SA and PGS ASA, you can compare the effects of market volatilities on Subsea 7 and PGS ASA 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 Subsea 7 with a short position of PGS ASA. Check out your portfolio center. Please also check ongoing floating volatility patterns of Subsea 7 and PGS ASA.
Diversification Opportunities for Subsea 7 and PGS ASA
The 3 months correlation between Subsea and PGS is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Subsea 7 SA and PGS ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PGS ASA and Subsea 7 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 Subsea 7 SA are associated (or correlated) with PGS ASA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PGS ASA has no effect on the direction of Subsea 7 i.e., Subsea 7 and PGS ASA go up and down completely randomly.
Assuming the 90 days trading horizon Subsea 7 SA is expected to generate 0.47 times more return on investment than PGS ASA. However, Subsea 7 SA is 2.11 times less risky than PGS ASA. It trades about 0.1 of its potential returns per unit of risk. PGS ASA is currently generating about 0.04 per unit of risk. If you would invest 7,888 in Subsea 7 SA on March 6, 2024 and sell it today you would earn a total of 11,292 from holding Subsea 7 SA or generate 143.15% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Subsea 7 SA are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Subsea 7 disclosed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in PGS ASA are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, PGS ASA disclosed solid returns over the last few months and may actually be approaching a breakup point.