Correlation Between CMS Energy and CenterPoint Energy

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

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

Diversification Opportunities for CMS Energy and CenterPoint Energy

0.85

Correlation Coefficient

CMS Energy  CenterPoint Energy

Very poor diversification

The 3 months correlation between CMS and CenterPoint is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding CMS Energy and CenterPoint Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CenterPoint Energy and CMS Energy 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 CMS Energy are associated (or correlated) with CenterPoint Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CenterPoint Energy has no effect on the direction of CMS Energy i.e., CMS Energy and CenterPoint Energy go up and down completely randomly.

Pair Corralation between CMS Energy and CenterPoint Energy

Considering the 90-day investment horizon CMS Energy is expected to generate 1.75 times less return on investment than CenterPoint Energy. But when comparing it to its historical volatility, CMS Energy is 1.17 times less risky than CenterPoint Energy. It trades about 0.1 of its potential returns per unit of risk. CenterPoint Energy is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,760  in CenterPoint Energy on January 25, 2024 and sell it today you would earn a total of  113.00  from holding CenterPoint Energy or generate 4.09% return on investment over 90 days.

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

CMS Energy  vs.  CenterPoint Energy

CMS Energy

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in CMS Energy are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain primary indicators, CMS Energy may actually be approaching a critical reversion point that can send shares even higher in May 2024.

CenterPoint Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in CenterPoint Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, CenterPoint Energy is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with CMS Energy and CenterPoint Energy

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

The idea behind CMS Energy and CenterPoint 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.