Correlation Between Permian Basin and Mesa Royalty

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

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

Diversification Opportunities for Permian Basin and Mesa Royalty

0.73

Correlation Coefficient

Permian Basin  Mesa Royalty

Poor diversification

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

Pair Corralation between Permian Basin and Mesa Royalty

Considering the 90-day investment horizon Permian Basin Royalty is expected to generate 0.96 times more return on investment than Mesa Royalty. However, Permian Basin Royalty is 1.04 times less risky than Mesa Royalty. It trades about -0.26 of its potential returns per unit of risk. Mesa Royalty Trust is currently generating about -0.28 per unit of risk. If you would invest  1,281  in Permian Basin Royalty on September 25, 2024 and sell it today you would lose (177.00) from holding Permian Basin Royalty or give up 13.82% of portfolio value over 90 days.

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

Permian Basin Royalty  vs.  Mesa Royalty Trust

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.

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.

Pair Trading with Permian Basin and Mesa Royalty

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

The idea behind Permian Basin Royalty and Mesa Royalty Trust 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.