Correlation Between American Electric and Utilities Portfolio

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

Diversification Opportunities for American Electric and Utilities Portfolio

-0.37

Correlation Coefficient

American Electric  Utilities Portfolio

Very good diversification

The 3 months correlation between American and Utilities is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Utilities Portfolio Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Utilities Portfolio 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 Utilities Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Utilities Portfolio has no effect on the direction of American Electric i.e., American Electric and Utilities Portfolio go up and down completely randomly.

Pair Corralation between American Electric and Utilities Portfolio

Considering the 90-day investment horizon American Electric is expected to generate 1.34 times less return on investment than Utilities Portfolio. In addition to that, American Electric is 1.15 times more volatile than Utilities Portfolio Utilities. It trades about 0.07 of its total potential returns per unit of risk. Utilities Portfolio Utilities is currently generating about 0.1 per unit of volatility. If you would invest  9,871  in Utilities Portfolio Utilities on September 13, 2024 and sell it today you would earn a total of  2,741  from holding Utilities Portfolio Utilities or generate 27.77% return on investment over 90 days.

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

American Electric Power  vs.  Utilities Portfolio Utilities

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 latest weak performance, the Stock's technical and fundamental indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Utilities Portfolio

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Utilities Portfolio Utilities are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Utilities Portfolio is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Electric and Utilities Portfolio

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

The idea behind American Electric Power and Utilities Portfolio Utilities 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.