Correlation Between American Water and Essential Utilities

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

Diversification Opportunities for American Water and Essential Utilities

0.96

Correlation Coefficient

American Water  Essential Utilities

Almost no diversification

The 3 months correlation between American and Essential is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Essential Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essential Utilities 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 Essential Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essential Utilities has no effect on the direction of American Water i.e., American Water and Essential Utilities go up and down completely randomly.

Pair Corralation between American Water and Essential Utilities

Considering the 90-day investment horizon American Water Works is expected to generate 1.12 times more return on investment than Essential Utilities. However, American Water is 1.12 times more volatile than Essential Utilities. It trades about 0.16 of its potential returns per unit of risk. Essential Utilities is currently generating about 0.1 per unit of risk. If you would invest  12,347  in American Water Works on December 30, 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 Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

American Water Works  vs.  Essential Utilities

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.

Essential Utilities

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Essential Utilities are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Essential Utilities may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with American Water and Essential Utilities

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

The idea behind American Water Works and Essential Utilities 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.

Check out your portfolio center.

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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.