Correlation Between American Water and Global Water

Can any of the company-specific risk be diversified away by investing in both American Water and Global Water 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 Water and Global Water into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between American Water Works and Global Water Resources, you can compare the effects of market volatilities on American Water and Global Water 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 Water with a short position of Global Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Water and Global Water.

Diversification Opportunities for American Water and Global Water

-0.05

Correlation Coefficient

American Water  Global Water

Good diversification

The 3 months correlation between American and Global is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Global Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Water Resources and American Water 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 Water Works are associated (or correlated) with Global Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Water Resources has no effect on the direction of American Water i.e., American Water and Global Water go up and down completely randomly.

Pair Corralation between American Water and Global Water

Considering the 90-day investment horizon American Water Works is expected to generate 1.06 times more return on investment than Global Water. However, American Water is 1.06 times more volatile than Global Water Resources. It trades about 0.12 of its potential returns per unit of risk. Global Water Resources is currently generating about -0.14 per unit of risk. If you would invest  11,714  in American Water Works on January 25, 2024 and sell it today you would earn a total of  422.00  from holding American Water Works or generate 3.6% return on investment over 90 days.

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

American Water Works  vs.  Global Water Resources

American Water Works

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Water Works has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, American Water is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Global Water Resources

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with American Water and Global Water

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

The idea behind American Water Works and Global Water Resources 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.