Correlation Between American Electric and Exelon

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

Diversification Opportunities for American Electric and Exelon

0.82

Correlation Coefficient

American Electric  Exelon

Very poor diversification

The 3 months correlation between American and Exelon is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Exelon in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exelon 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 Exelon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exelon has no effect on the direction of American Electric i.e., American Electric and Exelon go up and down completely randomly.

Pair Corralation between American Electric and Exelon

Considering the 90-day investment horizon American Electric is expected to generate 1.28 times less return on investment than Exelon. But when comparing it to its historical volatility, American Electric Power is 1.04 times less risky than Exelon. It trades about 0.17 of its potential returns per unit of risk. Exelon is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  3,622  in Exelon on October 16, 2024 and sell it today you would earn a total of  134.00  from holding Exelon or generate 3.7% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	94.74%
Values	Daily Returns

American Electric Power  vs.  Exelon

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.

Exelon

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Exelon has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest conflicting performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with American Electric and Exelon

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

The idea behind American Electric Power and Exelon 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.