Correlation Between Aris Water and Middlesex Water

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

By analyzing existing cross correlation between Aris Water Solutions and Middlesex Water, you can compare the effects of market volatilities on Aris Water and Middlesex Water 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 Aris Water with a short position of Middlesex Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Aris Water and Middlesex Water.

Diversification Opportunities for Aris Water and Middlesex Water

0.62

Correlation Coefficient

Aris Water  Middlesex Water

Poor diversification

The 3 months correlation between Aris and Middlesex is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Aris Water Solutions and Middlesex Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Middlesex Water and Aris Water 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 Aris Water Solutions are associated (or correlated) with Middlesex Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Middlesex Water has no effect on the direction of Aris Water i.e., Aris Water and Middlesex Water go up and down completely randomly.

Pair Corralation between Aris Water and Middlesex Water

Given the investment horizon of 90 days Aris Water Solutions is expected to generate 2.3 times more return on investment than Middlesex Water. However, Aris Water is 2.3 times more volatile than Middlesex Water. It trades about 0.21 of its potential returns per unit of risk. Middlesex Water is currently generating about 0.05 per unit of risk. If you would invest  1,591  in Aris Water Solutions on September 3, 2024 and sell it today you would earn a total of  1,099  from holding Aris Water Solutions or generate 69.08% return on investment over 90 days.

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

Aris Water Solutions  vs.  Middlesex Water

Aris Water Solutions

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aris Water Solutions are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak forward indicators, Aris Water unveiled solid returns over the last few months and may actually be approaching a breakup point.

Middlesex Water

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Middlesex Water are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Middlesex Water is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Aris Water and Middlesex Water

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

The idea behind Aris Water Solutions and Middlesex Water 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.