Correlation Between American Water and Cadiz

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

Diversification Opportunities for American Water and Cadiz

-0.9

Correlation Coefficient

American Water  Cadiz

Pay attention - limited upside

The 3 months correlation between American and Cadiz is -0.9. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Cadiz Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cadiz Inc 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 Cadiz. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cadiz Inc has no effect on the direction of American Water i.e., American Water and Cadiz go up and down completely randomly.

Pair Corralation between American Water and Cadiz

Considering the 90-day investment horizon American Water Works is expected to generate 0.42 times more return on investment than Cadiz. However, American Water Works is 2.39 times less risky than Cadiz. It trades about 0.16 of its potential returns per unit of risk. Cadiz Inc is currently generating about -0.17 per unit of risk. If you would invest  12,347  in American Water Works on December 29, 2024 and sell it today you would earn a total of  2,277  from holding American Water Works or generate 18.44% return on investment over 90 days.

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

American Water Works  vs.  Cadiz Inc

American Water Works

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Water Works are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain basic indicators, American Water disclosed solid returns over the last few months and may actually be approaching a breakup point.

Cadiz Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cadiz Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with American Water and Cadiz

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

The idea behind American Water Works and Cadiz Inc 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.