Correlation Between Ecopetrol and Japan Exchange

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

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

Diversification Opportunities for Ecopetrol and Japan Exchange

-0.3

Correlation Coefficient

Ecopetrol  Japan Exchange

Very good diversification

The 3 months correlation between Ecopetrol and Japan is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Ecopetrol SA ADR and Japan Exchange Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Exchange Group and Ecopetrol 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 Ecopetrol SA ADR are associated (or correlated) with Japan Exchange. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Exchange Group has no effect on the direction of Ecopetrol i.e., Ecopetrol and Japan Exchange go up and down completely randomly.

Pair Corralation between Ecopetrol and Japan Exchange

Allowing for the 90-day total investment horizon Ecopetrol SA ADR is expected to generate 0.86 times more return on investment than Japan Exchange. However, Ecopetrol SA ADR is 1.16 times less risky than Japan Exchange. It trades about 0.13 of its potential returns per unit of risk. Japan Exchange Group is currently generating about -0.19 per unit of risk. If you would invest  1,136  in Ecopetrol SA ADR on January 30, 2024 and sell it today you would earn a total of  49.00  from holding Ecopetrol SA ADR or generate 4.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Ecopetrol SA ADR  vs.  Japan Exchange Group

Ecopetrol SA ADR

Risk-Adjusted Performance

2 of 100

Weak

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.

Japan Exchange Group

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Exchange Group are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical and fundamental indicators, Japan Exchange may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Ecopetrol and Japan Exchange

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

The idea behind Ecopetrol SA ADR and Japan Exchange Group 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.