Correlation Between Centrais Electricas and American Electric

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

By analyzing existing cross correlation between Centrais Electricas Brasileiras and American Electric Power, you can compare the effects of market volatilities on Centrais Electricas and American Electric 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 Centrais Electricas with a short position of American Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Centrais Electricas and American Electric.

Diversification Opportunities for Centrais Electricas and American Electric

0.05

Correlation Coefficient

Centrais Electricas  American Electric

Significant diversification

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

Pair Corralation between Centrais Electricas and American Electric

Considering the 90-day investment horizon Centrais Electricas Brasileiras is expected to under-perform the American Electric. In addition to that, Centrais Electricas is 1.2 times more volatile than American Electric Power. It trades about -0.46 of its total potential returns per unit of risk. American Electric Power is currently generating about -0.01 per unit of volatility. If you would invest  8,285  in American Electric Power on January 20, 2024 and sell it today you would lose (29.00) from holding American Electric Power or give up 0.35% of portfolio value over 90 days.

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

Centrais Electricas Brasileira  vs.  American Electric Power

Centrais Electricas

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Centrais Electricas Brasileiras has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest weak performance, the Stock's fundamental drivers remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

American Electric Power

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 7 (%) 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.

Pair Trading with Centrais Electricas and American Electric

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

The idea behind Centrais Electricas Brasileiras and American Electric Power 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .