Correlation Between American Electric and Nextera Energy

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

Diversification Opportunities for American Electric and Nextera Energy

0.18

Correlation Coefficient

American Electric  Nextera Energy

Average diversification

The 3 months correlation between American and Nextera is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Nextera Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nextera Energy 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 Nextera Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nextera Energy has no effect on the direction of American Electric i.e., American Electric and Nextera Energy go up and down completely randomly.

Pair Corralation between American Electric and Nextera Energy

Considering the 90-day investment horizon American Electric Power is expected to generate 0.72 times more return on investment than Nextera Energy. However, American Electric Power is 1.39 times less risky than Nextera Energy. It trades about 0.2 of its potential returns per unit of risk. Nextera Energy is currently generating about 0.0 per unit of risk. If you would invest  9,121  in American Electric Power on December 29, 2024 and sell it today you would earn a total of  1,575  from holding American Electric Power or generate 17.27% return on investment over 90 days.

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

American Electric Power  vs.  Nextera Energy

American Electric Power

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating technical and fundamental indicators, American Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Nextera Energy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nextera Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Nextera Energy 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 Nextera Energy

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

The idea behind American Electric Power and Nextera 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 Commodity Directory module to find actively traded commodities issued by global exchanges.