Correlation Between Mesa Royalty and Permian Basin

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

By analyzing existing cross correlation between Mesa Royalty Trust and Permian Basin Royalty, you can compare the effects of market volatilities on Mesa Royalty and Permian Basin 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 Mesa Royalty with a short position of Permian Basin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mesa Royalty and Permian Basin.

Diversification Opportunities for Mesa Royalty and Permian Basin

0.73

Correlation Coefficient

Mesa Royalty  Permian Basin

Poor diversification

The 3 months correlation between Mesa and Permian is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Mesa Royalty Trust and Permian Basin Royalty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Permian Basin Royalty and Mesa Royalty 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 Mesa Royalty Trust are associated (or correlated) with Permian Basin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Permian Basin Royalty has no effect on the direction of Mesa Royalty i.e., Mesa Royalty and Permian Basin go up and down completely randomly.

Pair Corralation between Mesa Royalty and Permian Basin

Considering the 90-day investment horizon Mesa Royalty Trust is expected to under-perform the Permian Basin. In addition to that, Mesa Royalty is 1.08 times more volatile than Permian Basin Royalty. It trades about -0.09 of its total potential returns per unit of risk. Permian Basin Royalty is currently generating about -0.02 per unit of volatility. If you would invest  1,347  in Permian Basin Royalty on September 25, 2024 and sell it today you would lose (243.00) from holding Permian Basin Royalty or give up 18.04% of portfolio value over 90 days.

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

Mesa Royalty Trust  vs.  Permian Basin Royalty

Mesa Royalty Trust

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Mesa Royalty Trust are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Mesa Royalty may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Permian Basin Royalty

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Permian Basin Royalty has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental drivers, Permian Basin is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Mesa Royalty and Permian Basin

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

The idea behind Mesa Royalty Trust and Permian Basin Royalty 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.

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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.