Correlation Between American Electric and Pacific Gas

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

Diversification Opportunities for American Electric and Pacific Gas

-0.45

Correlation Coefficient

American Electric  Pacific Gas

Very good diversification

The 3 months correlation between American and Pacific is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Pacific Gas and in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pacific Gas 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 Pacific Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pacific Gas has no effect on the direction of American Electric i.e., American Electric and Pacific Gas go up and down completely randomly.

Pair Corralation between American Electric and Pacific Gas

Considering the 90-day investment horizon American Electric Power is expected to generate 1.12 times more return on investment than Pacific Gas. However, American Electric is 1.12 times more volatile than Pacific Gas and. It trades about 0.2 of its potential returns per unit of risk. Pacific Gas and is currently generating about -0.03 per unit of risk. If you would invest  9,121  in American Electric Power on December 30, 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 Against
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

American Electric Power  vs.  Pacific Gas and

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.

Pacific Gas

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pacific Gas and has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Pacific Gas is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Electric and Pacific Gas

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

The idea behind American Electric Power and Pacific Gas and 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.