Correlation Between American Water and Middlesex Water

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

Diversification Opportunities for American Water and Middlesex Water

0.92

Correlation Coefficient

American Water  Middlesex Water

Almost no diversification

The 3 months correlation between American and Middlesex is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Middlesex Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Middlesex Water 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 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 American Water i.e., American Water and Middlesex Water go up and down completely randomly.

Pair Corralation between American Water and Middlesex Water

Considering the 90-day investment horizon American Water is expected to generate 1.15 times less return on investment than Middlesex Water. But when comparing it to its historical volatility, American Water Works is 1.56 times less risky than Middlesex Water. It trades about 0.16 of its potential returns per unit of risk. Middlesex Water is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  5,289  in Middlesex Water on December 30, 2024 and sell it today you would earn a total of  1,059  from holding Middlesex Water or generate 20.02% return on investment over 90 days.

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

American Water Works  vs.  Middlesex Water

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.

Middlesex Water

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Middlesex Water are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal technical and fundamental indicators, Middlesex Water showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Water and Middlesex Water

The main advantage of trading using opposite American Water and Middlesex Water positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American 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 American Water Works 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 Transaction History module to view history of all your transactions and understand their impact on performance.