Correlation Between Petroleo Brasileiro and IPC

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Can any of the company-specific risk be diversified away by investing in both Petroleo Brasileiro and IPC 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 Petroleo Brasileiro and IPC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Petroleo Brasileiro SA and IPC, you can compare the effects of market volatilities on Petroleo Brasileiro and IPC 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 Petroleo Brasileiro with a short position of IPC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Petroleo Brasileiro and IPC.

Diversification Opportunities for Petroleo Brasileiro and IPC

-0.72
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between Petroleo and IPC is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Petroleo Brasileiro SA and IPC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IPC and Petroleo Brasileiro 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 Petroleo Brasileiro SA are associated (or correlated) with IPC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IPC has no effect on the direction of Petroleo Brasileiro i.e., Petroleo Brasileiro and IPC go up and down completely randomly.
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Pair Corralation between Petroleo Brasileiro and IPC

Considering the 90-day investment horizon Petroleo Brasileiro SA is expected to generate 2.8 times more return on investment than IPC. However, Petroleo Brasileiro is 2.8 times more volatile than IPC. It trades about 0.11 of its potential returns per unit of risk. IPC is currently generating about 0.0 per unit of risk. If you would invest  534.00  in Petroleo Brasileiro SA on September 1, 2022 and sell it today you would earn a total of  635.00  from holding Petroleo Brasileiro SA or generate 118.91% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy96.65%
ValuesDaily Returns

Petroleo Brasileiro SA  vs.  IPC

 Performance (%) 
       Timeline  

Petroleo Brasileiro and IPC Volatility Contrast

   Predicted Return Density   
       Returns  

IPC

Pair trading matchups for IPC

The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against IPC as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. IPC's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, IPC's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to IPC.

Pair Trading with Petroleo Brasileiro and IPC

The main advantage of trading using opposite Petroleo Brasileiro and IPC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Petroleo Brasileiro position performs unexpectedly, IPC 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 IPC will offset losses from the drop in IPC's long position.
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The idea behind Petroleo Brasileiro SA and IPC 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against IPC as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. IPC's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, IPC's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to IPC.
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.

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