Correlation Between Southern and Xcel Energy

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Can any of the company-specific risk be diversified away by investing in both Southern and Xcel 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 Southern and Xcel Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Southern Company and Xcel Energy, you can compare the effects of market volatilities on Southern and Xcel 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 Southern with a short position of Xcel Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southern and Xcel Energy.

Diversification Opportunities for Southern and Xcel Energy

0.07
  Correlation Coefficient

Significant diversification

The 3 months correlation between Southern and Xcel is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and Xcel Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xcel Energy and Southern 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 Southern Company are associated (or correlated) with Xcel Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xcel Energy has no effect on the direction of Southern i.e., Southern and Xcel Energy go up and down completely randomly.

Pair Corralation between Southern and Xcel Energy

Allowing for the 90-day total investment horizon Southern Company is expected to generate 0.3 times more return on investment than Xcel Energy. However, Southern Company is 3.3 times less risky than Xcel Energy. It trades about 0.36 of its potential returns per unit of risk. Xcel Energy is currently generating about -0.08 per unit of risk. If you would invest  6,681  in Southern Company on December 30, 2023 and sell it today you would earn a total of  493.00  from holding Southern Company or generate 7.38% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Southern Company  vs.  Xcel Energy

 Performance 
       Timeline  
Southern 

Risk-Adjusted Performance

3 of 100

 
Low
 
High
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Southern Company are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Southern is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.
Xcel Energy 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Xcel Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain quite persistent which may send shares a bit higher in April 2024. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Southern and Xcel Energy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Southern and Xcel Energy

The main advantage of trading using opposite Southern and Xcel Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southern position performs unexpectedly, Xcel 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 Xcel Energy will offset losses from the drop in Xcel Energy's long position.
The idea behind Southern Company and Xcel 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.

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