Correlation Between American Electric and Ford
Can any of the company-specific risk be diversified away by investing in both American Electric and Ford 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 Ford 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 Ford Motor, you can compare the effects of market volatilities on American Electric and Ford 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 Ford. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Ford.
Diversification Opportunities for American Electric and Ford
0.74 | Correlation Coefficient |
Poor diversification
The 3 months correlation between American and Ford is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Ford Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ford Motor 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 Ford. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ford Motor has no effect on the direction of American Electric i.e., American Electric and Ford go up and down completely randomly.
Pair Corralation between American Electric and Ford
Considering the 90-day investment horizon American Electric Power is expected to generate 0.6 times more return on investment than Ford. However, American Electric Power is 1.68 times less risky than Ford. It trades about -0.01 of its potential returns per unit of risk. Ford Motor is currently generating about -0.14 per unit of risk. If you would invest 8,285 in American Electric Power on January 20, 2024 and sell it today you would lose (29.00) from holding American Electric Power or give up 0.35% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.45% |
| Values | Daily Returns |
American Electric Power vs. Ford Motor
Performance |
| Timeline |
| American Electric Power |
| Ford Motor |
American Electric and Ford Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Electric and Ford
The main advantage of trading using opposite American Electric and Ford positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Ford 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 Ford will offset losses from the drop in Ford's long position.The idea behind American Electric Power and Ford Motor 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 CEOs Directory module to screen CEOs from public companies around the world.
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