Can any of the company-specific risk be diversified away by investing in both Exxon 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 Exxon and Shell PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Exxon Mobil Corp and Shell PLC, you can compare the effects of market volatilities on Exxon 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 Exxon with a short position of Shell PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Shell PLC.
Diversification Opportunities for Exxon and Shell PLC
The 3 months correlation between Exxon and Shell is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp and Shell PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shell 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 Corp 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 Exxon i.e., Exxon and Shell PLC go up and down completely randomly.
Considering the 90-day investment horizon Exxon Mobil Corp is expected to generate 0.5 times more return on investment than Shell PLC. However, Exxon Mobil Corp is 2.01 times less risky than Shell PLC. It trades about -0.04 of its potential returns per unit of risk. Shell PLC is currently generating about -0.06 per unit of risk. If you would invest 11,581 in Exxon Mobil Corp on March 6, 2024 and sell it today you would lose (136.00) from holding Exxon Mobil Corp or give up 1.17% of portfolio value over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Exxon may actually be approaching a critical reversion point that can send shares even higher in July 2024.
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.