Correlation Between American Water and Pure Cycle

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

Diversification Opportunities for American Water and Pure Cycle

-0.54

Correlation Coefficient

American Water  Pure Cycle

Excellent diversification

The 3 months correlation between American and Pure is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Pure Cycle in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pure Cycle 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 Pure Cycle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pure Cycle has no effect on the direction of American Water i.e., American Water and Pure Cycle go up and down completely randomly.

Pair Corralation between American Water and Pure Cycle

Considering the 90-day investment horizon American Water Works is expected to under-perform the Pure Cycle. But the stock apears to be less risky and, when comparing its historical volatility, American Water Works is 1.54 times less risky than Pure Cycle. The stock trades about -0.02 of its potential returns per unit of risk. The Pure Cycle is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,027  in Pure Cycle on September 21, 2024 and sell it today you would earn a total of  189.00  from holding Pure Cycle or generate 18.4% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

American Water Works  vs.  Pure Cycle

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 uncertain performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pure Cycle

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Pure Cycle are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal basic indicators, Pure Cycle displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Water and Pure Cycle

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

The idea behind American Water Works and Pure Cycle 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.