Correlation Between American Electric and National Grid

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

Diversification Opportunities for American Electric and National Grid

0.85

Correlation Coefficient

American Electric  National Grid

Very poor diversification

The 3 months correlation between American and National is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and National Grid PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Grid PLC 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 National Grid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Grid PLC has no effect on the direction of American Electric i.e., American Electric and National Grid go up and down completely randomly.

Pair Corralation between American Electric and National Grid

Considering the 90-day investment horizon American Electric Power is expected to generate 0.87 times more return on investment than National Grid. However, American Electric Power is 1.15 times less risky than National Grid. It trades about 0.06 of its potential returns per unit of risk. National Grid PLC is currently generating about 0.02 per unit of risk. If you would invest  7,962  in American Electric Power on August 31, 2024 and sell it today you would earn a total of  2,024  from holding American Electric Power or generate 25.42% return on investment over 90 days.

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

American Electric Power  vs.  National Grid PLC

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.

National Grid PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days National Grid PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, National Grid is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with American Electric and National Grid

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

The idea behind American Electric Power and National Grid PLC 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.