Correlation Between Algonquin Power and Hydro One

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

Diversification Opportunities for Algonquin Power and Hydro One

0.52

Correlation Coefficient

Algonquin Power  Hydro One

Very weak diversification

The 3 months correlation between Algonquin and Hydro is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Algonquin Power Utilities and Hydro One in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hydro One 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 Hydro One. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hydro One has no effect on the direction of Algonquin Power i.e., Algonquin Power and Hydro One go up and down completely randomly.

Pair Corralation between Algonquin Power and Hydro One

Assuming the 90 days trading horizon Algonquin Power Utilities is expected to generate 1.79 times more return on investment than Hydro One. However, Algonquin Power is 1.79 times more volatile than Hydro One. It trades about 0.04 of its potential returns per unit of risk. Hydro One is currently generating about -0.02 per unit of risk. If you would invest  685.00  in Algonquin Power Utilities on November 29, 2024 and sell it today you would earn a total of  23.00  from holding Algonquin Power Utilities or generate 3.36% return on investment over 90 days.

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

Algonquin Power Utilities  vs.  Hydro One

Algonquin Power Utilities

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Algonquin Power Utilities are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Algonquin Power is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Hydro One

Risk-Adjusted Performance

Very Weak

Over the last 90 days Hydro One has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Hydro One 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 Hydro One

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

The idea behind Algonquin Power Utilities and Hydro One 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.