Correlation Between American Electric and Southern

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

Diversification Opportunities for American Electric and Southern

0.93

Correlation Coefficient

American Electric  Southern

Almost no diversification

The 3 months correlation between American and Southern is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Southern Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern 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 Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern has no effect on the direction of American Electric i.e., American Electric and Southern go up and down completely randomly.

Pair Corralation between American Electric and Southern

Considering the 90-day investment horizon American Electric Power is expected to generate 0.98 times more return on investment than Southern. However, American Electric Power is 1.02 times less risky than Southern. It trades about 0.2 of its potential returns per unit of risk. Southern Company is currently generating about 0.14 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	Very Strong
Accuracy	100.0%
Values	Daily Returns

American Electric Power  vs.  Southern Company

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.

Southern

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Company are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Southern may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with American Electric and Southern

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

The idea behind American Electric Power and Southern Company 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.