Correlation Between American Water and Fast Retailing

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

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

Diversification Opportunities for American Water and Fast Retailing

-0.28

Correlation Coefficient

American Water  Fast Retailing

Very good diversification

The 3 months correlation between American and Fast is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Fast Retailing Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fast Retailing and American 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 American Water Works are associated (or correlated) with Fast Retailing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fast Retailing has no effect on the direction of American Water i.e., American Water and Fast Retailing go up and down completely randomly.

Pair Corralation between American Water and Fast Retailing

Assuming the 90 days horizon American Water Works is expected to under-perform the Fast Retailing. But the stock apears to be less risky and, when comparing its historical volatility, American Water Works is 1.2 times less risky than Fast Retailing. The stock trades about -0.01 of its potential returns per unit of risk. The Fast Retailing Co is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  17,667  in Fast Retailing Co on October 4, 2024 and sell it today you would earn a total of  14,703  from holding Fast Retailing Co or generate 83.22% return on investment over 90 days.

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

American Water Works  vs.  Fast Retailing Co

American Water Works

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Water Works has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Fast Retailing

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Fast Retailing Co are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Fast Retailing may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with American Water and Fast Retailing

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

The idea behind American Water Works and Fast Retailing Co 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.