Correlation Between Edison International and NextEra Energy

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

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

Diversification Opportunities for Edison International and NextEra Energy

0.08

Correlation Coefficient

Edison International  NextEra Energy

Significant diversification

The 3 months correlation between Edison and NextEra is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Edison International and NextEra Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NextEra Energy and Edison International 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 Edison International are associated (or correlated) with NextEra Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NextEra Energy has no effect on the direction of Edison International i.e., Edison International and NextEra Energy go up and down completely randomly.

Pair Corralation between Edison International and NextEra Energy

Assuming the 90 days horizon Edison International is expected to generate 0.8 times more return on investment than NextEra Energy. However, Edison International is 1.25 times less risky than NextEra Energy. It trades about 0.03 of its potential returns per unit of risk. NextEra Energy is currently generating about -0.06 per unit of risk. If you would invest  7,659  in Edison International on September 15, 2024 and sell it today you would earn a total of  121.00  from holding Edison International or generate 1.58% return on investment over 90 days.

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

Edison International  vs.  NextEra Energy

Edison International

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Edison International are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Edison International is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

NextEra Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NextEra Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Edison International and NextEra Energy

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

The idea behind Edison International and NextEra Energy 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.