Correlation Between Consolidated Water and Global Water

Can any of the company-specific risk be diversified away by investing in both Consolidated 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 Consolidated 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 Consolidated Water Co and Global Water Resources, you can compare the effects of market volatilities on Consolidated 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 Consolidated Water with a short position of Global Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Consolidated Water and Global Water.

Diversification Opportunities for Consolidated Water and Global Water

0.5

Correlation Coefficient

Consolidated Water  Global Water

Very weak diversification

The 3 months correlation between Consolidated and Global is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Consolidated Water Co 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 Consolidated 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 Consolidated Water Co 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 Consolidated Water i.e., Consolidated Water and Global Water go up and down completely randomly.

Pair Corralation between Consolidated Water and Global Water

Given the investment horizon of 90 days Consolidated Water Co is expected to under-perform the Global Water. In addition to that, Consolidated Water is 1.08 times more volatile than Global Water Resources. It trades about -0.02 of its total potential returns per unit of risk. Global Water Resources is currently generating about 0.06 per unit of volatility. If you would invest  1,218  in Global Water Resources on February 13, 2024 and sell it today you would earn a total of  85.00  from holding Global Water Resources or generate 6.98% return on investment over 90 days.

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

Consolidated Water Co  vs.  Global Water Resources

Consolidated Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Consolidated Water Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Consolidated Water is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Global Water Resources

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Global Water Resources are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, Global Water may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Consolidated Water and Global Water

The main advantage of trading using opposite Consolidated Water and Global Water positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Consolidated 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 Consolidated Water Co 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.