Correlation Between NRG Energy and PPL

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

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

Diversification Opportunities for NRG Energy and PPL

0.73

Correlation Coefficient

NRG Energy  PPL

Poor diversification

The 3 months correlation between NRG and PPL is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding NRG Energy and PPL Corp. in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PPL Corporation and NRG 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 NRG Energy are associated (or correlated) with PPL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PPL Corporation has no effect on the direction of NRG Energy i.e., NRG Energy and PPL go up and down completely randomly.

Pair Corralation between NRG Energy and PPL

Considering the 90-day investment horizon NRG Energy is expected to generate 2.01 times more return on investment than PPL. However, NRG Energy is 2.01 times more volatile than PPL Corporation. It trades about 0.11 of its potential returns per unit of risk. PPL Corporation is currently generating about -0.06 per unit of risk. If you would invest  6,714  in NRG Energy on January 20, 2024 and sell it today you would earn a total of  338.00  from holding NRG Energy or generate 5.03% return on investment over 90 days.

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

NRG Energy  vs.  PPL Corp.

NRG Energy

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating basic indicators, NRG Energy reported solid returns over the last few months and may actually be approaching a breakup point.

PPL Corporation

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in PPL Corporation are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, PPL is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with NRG Energy and PPL

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

The idea behind NRG Energy and PPL Corporation 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.