Correlation Between American Electric and DTE Energy
Can any of the company-specific risk be diversified away by investing in both American Electric and DTE Energy 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 American Electric and DTE Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Electric Power and DTE Energy, you can compare the effects of market volatilities on American Electric and DTE Energy 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 American Electric with a short position of DTE Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and DTE Energy.
Diversification Opportunities for American Electric and DTE Energy
0.81 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between American and DTE is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and DTE Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DTE Energy and American Electric 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 American Electric Power are associated (or correlated) with DTE Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DTE Energy has no effect on the direction of American Electric i.e., American Electric and DTE Energy go up and down completely randomly.
Pair Corralation between American Electric and DTE Energy
Considering the 90-day investment horizon American Electric Power is expected to generate 0.91 times more return on investment than DTE Energy. However, American Electric Power is 1.1 times less risky than DTE Energy. It trades about 0.13 of its potential returns per unit of risk. DTE Energy is currently generating about 0.06 per unit of risk. If you would invest 8,287 in American Electric Power on January 25, 2024 and sell it today you would earn a total of 325.00 from holding American Electric Power or generate 3.92% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.45% |
| Values | Daily Returns |
American Electric Power vs. DTE Energy
Performance |
| Timeline |
| American Electric Power |
| DTE Energy |
American Electric and DTE Energy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Electric and DTE Energy
The main advantage of trading using opposite American Electric and DTE Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, DTE Energy 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 DTE Energy will offset losses from the drop in DTE Energy's long position.| American Electric vs. Southern Company | American Electric vs. Dominion Energy | American Electric vs. Nextera Energy | American Electric vs. Consolidated Edison |
| DTE Energy vs. Alliant Energy Corp | DTE Energy vs. Ameren Corp | DTE Energy vs. CenterPoint Energy | DTE Energy vs. Pinnacle West Capital |
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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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