Correlation Between Energy and Fuel Tech

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

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

Diversification Opportunities for Energy and Fuel Tech

0.23

Correlation Coefficient

Energy  Fuel Tech

Modest diversification

The 3 months correlation between Energy and Fuel is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Energy and Water and Fuel Tech in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fuel Tech and 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 Energy and Water are associated (or correlated) with Fuel Tech. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fuel Tech has no effect on the direction of Energy i.e., Energy and Fuel Tech go up and down completely randomly.

Pair Corralation between Energy and Fuel Tech

Given the investment horizon of 90 days Energy and Water is expected to generate 5.29 times more return on investment than Fuel Tech. However, Energy is 5.29 times more volatile than Fuel Tech. It trades about 0.0 of its potential returns per unit of risk. Fuel Tech is currently generating about -0.03 per unit of risk. If you would invest  0.38  in Energy and Water on December 27, 2024 and sell it today you would lose (0.18) from holding Energy and Water or give up 47.37% of portfolio value over 90 days.

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

Energy and Water  vs.  Fuel Tech

Energy and Water

Risk-Adjusted Performance

Very Weak

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

Fuel Tech

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fuel Tech has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent technical and fundamental indicators, Fuel Tech is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Energy and Fuel Tech

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

The idea behind Energy and Water and Fuel Tech 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.