Correlation Between Consolidated Edison and National Grid

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

By analyzing existing cross correlation between Consolidated Edison and National Grid plc, you can compare the effects of market volatilities on Consolidated Edison and National Grid 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 Consolidated Edison with a short position of National Grid. Check out your portfolio center. Please also check ongoing floating volatility patterns of Consolidated Edison and National Grid.

Diversification Opportunities for Consolidated Edison and National Grid

0.54

Correlation Coefficient

Consolidated Edison  National Grid

Very weak diversification

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

Pair Corralation between Consolidated Edison and National Grid

Allowing for the 90-day total investment horizon Consolidated Edison is expected to under-perform the National Grid. But the stock apears to be less risky and, when comparing its historical volatility, Consolidated Edison is 3.54 times less risky than National Grid. The stock trades about -0.08 of its potential returns per unit of risk. The National Grid plc is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  1,345  in National Grid plc on September 5, 2024 and sell it today you would lose (115.00) from holding National Grid plc or give up 8.55% of portfolio value over 90 days.

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

Consolidated Edison  vs.  National Grid plc

Consolidated Edison

Risk-Adjusted Performance

0 of 100

Very Weak

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

National Grid plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days National Grid plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, National Grid is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Consolidated Edison and National Grid

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

The idea behind Consolidated Edison and National Grid plc 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.