Correlation Between CMS Energy and Southern Company

Can any of the company-specific risk be diversified away by investing in both CMS Energy and Southern Company 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 CMS Energy and Southern Company into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between CMS Energy Corp and Southern Company Series, you can compare the effects of market volatilities on CMS Energy and Southern Company 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 CMS Energy with a short position of Southern Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of CMS Energy and Southern Company.

Diversification Opportunities for CMS Energy and Southern Company

0.33

Correlation Coefficient

CMS Energy  Southern Company

Weak diversification

The 3 months correlation between CMS and Southern is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding CMS Energy Corp and Southern Company Series in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern Company and CMS Energy 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 CMS Energy Corp are associated (or correlated) with Southern Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern Company has no effect on the direction of CMS Energy i.e., CMS Energy and Southern Company go up and down completely randomly.

Pair Corralation between CMS Energy and Southern Company

Given the investment horizon of 90 days CMS Energy Corp is expected to under-perform the Southern Company. But the stock apears to be less risky and, when comparing its historical volatility, CMS Energy Corp is 1.54 times less risky than Southern Company. The stock trades about -0.01 of its potential returns per unit of risk. The Southern Company Series is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,835  in Southern Company Series on December 28, 2024 and sell it today you would earn a total of  22.00  from holding Southern Company Series or generate 1.2% return on investment over 90 days.

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

CMS Energy Corp  vs.  Southern Company Series

CMS Energy Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days CMS Energy Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, CMS Energy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Southern Company

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Company Series are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound forward-looking indicators, Southern Company is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with CMS Energy and Southern Company

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

The idea behind CMS Energy Corp and Southern Company Series 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.