Correlation Between American Electric and Xcel Energy

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

Diversification Opportunities for American Electric and Xcel Energy

-0.72

Correlation Coefficient

American Electric  Xcel Energy

Pay attention - limited upside

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

Pair Corralation between American Electric and Xcel Energy

Considering the 90-day investment horizon American Electric Power is expected to under-perform the Xcel Energy. In addition to that, American Electric is 1.17 times more volatile than Xcel Energy. It trades about -0.01 of its total potential returns per unit of risk. Xcel Energy is currently generating about 0.17 per unit of volatility. If you would invest  5,258  in Xcel Energy on January 20, 2024 and sell it today you would earn a total of  214.00  from holding Xcel Energy or generate 4.07% return on investment over 90 days.

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

American Electric Power  vs.  Xcel Energy

American Electric Power

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain technical and fundamental indicators, American Electric may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Xcel Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Xcel Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's technical and fundamental indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with American Electric and Xcel Energy

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

The idea behind American Electric Power and Xcel 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.

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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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.