Correlation Between North American and Archrock

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

By analyzing existing cross correlation between North American Construction and Archrock, you can compare the effects of market volatilities on North American and Archrock 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 North American with a short position of Archrock. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Archrock.

Diversification Opportunities for North American and Archrock

0.6

Correlation Coefficient

North American  Archrock

Poor diversification

The 3 months correlation between North and Archrock is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Archrock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Archrock and North American 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 North American Construction are associated (or correlated) with Archrock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Archrock has no effect on the direction of North American i.e., North American and Archrock go up and down completely randomly.

Pair Corralation between North American and Archrock

Considering the 90-day investment horizon North American is expected to generate 4.62 times less return on investment than Archrock. In addition to that, North American is 1.13 times more volatile than Archrock. It trades about 0.04 of its total potential returns per unit of risk. Archrock is currently generating about 0.21 per unit of volatility. If you would invest  1,921  in Archrock on September 5, 2024 and sell it today you would earn a total of  671.00  from holding Archrock or generate 34.93% return on investment over 90 days.

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

North American Construction  vs.  Archrock

North American Const

Risk-Adjusted Performance

3 of 100

Insignificant

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

Archrock

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Archrock are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Archrock exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North American and Archrock

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

The idea behind North American Construction and Archrock 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.