Correlation Between American Water and Hennessy Gas

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

Diversification Opportunities for American Water and Hennessy Gas

0.51

Correlation Coefficient

American Water  Hennessy Gas

Very weak diversification

The 3 months correlation between American and Hennessy is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Hennessy Gas Utility in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Gas Utility 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 Hennessy Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Gas Utility has no effect on the direction of American Water i.e., American Water and Hennessy Gas go up and down completely randomly.

Pair Corralation between American Water and Hennessy Gas

Considering the 90-day investment horizon American Water Works is expected to generate 1.67 times more return on investment than Hennessy Gas. However, American Water is 1.67 times more volatile than Hennessy Gas Utility. It trades about 0.39 of its potential returns per unit of risk. Hennessy Gas Utility is currently generating about 0.08 per unit of risk. If you would invest  12,498  in American Water Works on December 4, 2024 and sell it today you would earn a total of  1,422  from holding American Water Works or generate 11.38% return on investment over 90 days.

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

American Water Works  vs.  Hennessy Gas Utility

American Water Works

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Water Works are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain basic indicators, American Water may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Hennessy Gas Utility

Risk-Adjusted Performance

Very Weak

Over the last 90 days Hennessy Gas Utility has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Hennessy Gas is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Water and Hennessy Gas

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

The idea behind American Water Works and Hennessy Gas Utility 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.