Correlation Between American Electric and EuroSite Power

Can any of the company-specific risk be diversified away by investing in both American Electric and EuroSite Power 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 EuroSite Power 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 EuroSite Power, you can compare the effects of market volatilities on American Electric and EuroSite Power 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 EuroSite Power. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and EuroSite Power.

Diversification Opportunities for American Electric and EuroSite Power

-0.02

Correlation Coefficient

American Electric  EuroSite Power

Good diversification

The 3 months correlation between American and EuroSite is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and EuroSite Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EuroSite Power 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 EuroSite Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EuroSite Power has no effect on the direction of American Electric i.e., American Electric and EuroSite Power go up and down completely randomly.

Pair Corralation between American Electric and EuroSite Power

Considering the 90-day investment horizon American Electric Power is expected to generate 0.12 times more return on investment than EuroSite Power. However, American Electric Power is 8.05 times less risky than EuroSite Power. It trades about -0.18 of its potential returns per unit of risk. EuroSite Power is currently generating about -0.11 per unit of risk. If you would invest  9,558  in American Electric Power on October 10, 2024 and sell it today you would lose (332.00) from holding American Electric Power or give up 3.47% of portfolio value over 90 days.

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

American Electric Power  vs.  EuroSite Power

American Electric Power

Risk-Adjusted Performance

0 of 100

Very 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 recent stock price agitation, may contribute to short-term losses for the retail investors.

EuroSite Power

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in EuroSite Power are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, EuroSite Power reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Electric and EuroSite Power

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

The idea behind American Electric Power and EuroSite 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.

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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.