Correlation Between American Electric and Eversource Energy

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Can any of the company-specific risk be diversified away by investing in both American Electric and Eversource 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 Eversource 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 Eversource Energy, you can compare the effects of market volatilities on American Electric and Eversource 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 Eversource Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Eversource Energy.

Diversification Opportunities for American Electric and Eversource Energy

0.74
  Correlation Coefficient

Poor diversification

The 3 months correlation between American and Eversource is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Eversource Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eversource 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 Eversource Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eversource Energy has no effect on the direction of American Electric i.e., American Electric and Eversource Energy go up and down completely randomly.

Pair Corralation between American Electric and Eversource Energy

Considering the 90-day investment horizon American Electric is expected to generate 1.03 times less return on investment than Eversource Energy. But when comparing it to its historical volatility, American Electric Power is 1.56 times less risky than Eversource Energy. It trades about 0.04 of its potential returns per unit of risk. Eversource Energy is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  5,854  in Eversource Energy on December 29, 2023 and sell it today you would earn a total of  44.00  from holding Eversource Energy or generate 0.75% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

American Electric Power  vs.  Eversource Energy

 Performance 
       Timeline  
American Electric Power 

Risk-Adjusted Performance

5 of 100

 
Low
 
High
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical and fundamental indicators, American Electric is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.
Eversource Energy 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Eversource Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Eversource Energy is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

American Electric and Eversource Energy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with American Electric and Eversource Energy

The main advantage of trading using opposite American Electric and Eversource Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Eversource 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 Eversource Energy will offset losses from the drop in Eversource Energy's long position.
The idea behind American Electric Power and Eversource Energy 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.

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