Correlation Between Western Energy and Ecopetrol
Can any of the company-specific risk be diversified away by investing in both Western Energy 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 Western Energy and Ecopetrol into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Western Energy Services and Ecopetrol SA ADR, you can compare the effects of market volatilities on Western Energy 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 Western Energy with a short position of Ecopetrol. Check out your portfolio center. Please also check ongoing floating volatility patterns of Western Energy and Ecopetrol.
Diversification Opportunities for Western Energy and Ecopetrol
0.71 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Western and Ecopetrol is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Western Energy Services 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 Western Energy 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 Western Energy Services 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 Western Energy i.e., Western Energy and Ecopetrol go up and down completely randomly.
Pair Corralation between Western Energy and Ecopetrol
Assuming the 90 days horizon Western Energy is expected to generate 1.75 times less return on investment than Ecopetrol. But when comparing it to its historical volatility, Western Energy Services is 1.6 times less risky than Ecopetrol. It trades about 0.2 of its potential returns per unit of risk. Ecopetrol SA ADR is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 1,034 in Ecopetrol SA ADR on January 20, 2024 and sell it today you would earn a total of 100.00 from holding Ecopetrol SA ADR or generate 9.67% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.45% |
| Values | Daily Returns |
Western Energy Services vs. Ecopetrol SA ADR
Performance |
| Timeline |
| Western Energy Services |
| Ecopetrol SA ADR |
Western Energy and Ecopetrol Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Western Energy and Ecopetrol
The main advantage of trading using opposite Western Energy and Ecopetrol positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Energy 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.| Western Energy vs. Compania de Minas | Western Energy vs. McEwen Mining | Western Energy vs. Endeavour Silver Corp | Western Energy vs. Hecla Mining |
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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.
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