Correlation Between Algonquin Power and Canadian Utilities

Can any of the company-specific risk be diversified away by investing in both Algonquin Power and Canadian Utilities 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 Algonquin Power and Canadian Utilities into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Algonquin Power Utilities and Canadian Utilities Limited, you can compare the effects of market volatilities on Algonquin Power and Canadian Utilities 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 Algonquin Power with a short position of Canadian Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Algonquin Power and Canadian Utilities.

Diversification Opportunities for Algonquin Power and Canadian Utilities

0.29

Correlation Coefficient

Algonquin Power  Canadian Utilities

Modest diversification

The 3 months correlation between Algonquin and Canadian is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Algonquin Power Utilities and Canadian Utilities Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Utilities and Algonquin Power 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 Algonquin Power Utilities are associated (or correlated) with Canadian Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Utilities has no effect on the direction of Algonquin Power i.e., Algonquin Power and Canadian Utilities go up and down completely randomly.

Pair Corralation between Algonquin Power and Canadian Utilities

Assuming the 90 days trading horizon Algonquin Power is expected to generate 12.15 times less return on investment than Canadian Utilities. But when comparing it to its historical volatility, Algonquin Power Utilities is 1.3 times less risky than Canadian Utilities. It trades about 0.01 of its potential returns per unit of risk. Canadian Utilities Limited is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,423  in Canadian Utilities Limited on September 5, 2024 and sell it today you would earn a total of  214.00  from holding Canadian Utilities Limited or generate 6.25% return on investment over 90 days.

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

Algonquin Power Utilities  vs.  Canadian Utilities Limited

Algonquin Power Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Algonquin Power Utilities has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Algonquin Power is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Canadian Utilities

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Utilities Limited are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Canadian Utilities is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Algonquin Power and Canadian Utilities

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

The idea behind Algonquin Power Utilities and Canadian Utilities Limited 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.