Correlation Between American Electric and Consolidated Edison

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

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

Diversification Opportunities for American Electric and Consolidated Edison

0.73

Correlation Coefficient

American Electric  Consolidated Edison

Poor diversification

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

Pair Corralation between American Electric and Consolidated Edison

Considering the 90-day investment horizon American Electric Power is expected to generate 1.15 times more return on investment than Consolidated Edison. However, American Electric is 1.15 times more volatile than Consolidated Edison. It trades about 0.0 of its potential returns per unit of risk. Consolidated Edison is currently generating about -0.01 per unit of risk. If you would invest  10,059  in American Electric Power on August 31, 2024 and sell it today you would lose (70.00) from holding American Electric Power or give up 0.7% of portfolio value over 90 days.

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

American Electric Power  vs.  Consolidated Edison

American Electric Power

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days American Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, American Electric is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

Consolidated Edison

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Consolidated Edison has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Consolidated Edison is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with American Electric and Consolidated Edison

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

The idea behind American Electric Power and Consolidated Edison 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.