Correlation Between Diversified Energy and United Utilities

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

By analyzing existing cross correlation between Diversified Energy and United Utilities Group, you can compare the effects of market volatilities on Diversified Energy and United 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 Diversified Energy with a short position of United Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diversified Energy and United Utilities.

Diversification Opportunities for Diversified Energy and United Utilities

0.76

Correlation Coefficient

Diversified Energy  United Utilities

Poor diversification

The 3 months correlation between Diversified and United is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Energy and United Utilities Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Utilities and Diversified 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 Diversified Energy are associated (or correlated) with United Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Utilities has no effect on the direction of Diversified Energy i.e., Diversified Energy and United Utilities go up and down completely randomly.

Pair Corralation between Diversified Energy and United Utilities

Assuming the 90 days trading horizon Diversified Energy is expected to generate 2.11 times more return on investment than United Utilities. However, Diversified Energy is 2.11 times more volatile than United Utilities Group. It trades about 0.02 of its potential returns per unit of risk. United Utilities Group is currently generating about 0.01 per unit of risk. If you would invest  129,897  in Diversified Energy on October 3, 2024 and sell it today you would earn a total of  4,503  from holding Diversified Energy or generate 3.47% return on investment over 90 days.

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

Diversified Energy  vs.  United Utilities Group

Diversified Energy

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Energy are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Diversified Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

United Utilities

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in United Utilities Group are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, United Utilities is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Diversified Energy and United Utilities

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

The idea behind Diversified Energy and United Utilities Group 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.