Correlation Between Endesa SA and American Electric

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

By analyzing existing cross correlation between Endesa SA ADR and American Electric Power, you can compare the effects of market volatilities on Endesa SA and American Electric 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 Endesa SA with a short position of American Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Endesa SA and American Electric.

Diversification Opportunities for Endesa SA and American Electric

0.7

Correlation Coefficient

Endesa SA  American Electric

Poor diversification

The 3 months correlation between Endesa and American is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Endesa SA ADR and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power and Endesa SA 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 Endesa SA ADR are associated (or correlated) with American Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of Endesa SA i.e., Endesa SA and American Electric go up and down completely randomly.

Pair Corralation between Endesa SA and American Electric

Assuming the 90 days horizon Endesa SA ADR is expected to generate 1.15 times more return on investment than American Electric. However, Endesa SA is 1.15 times more volatile than American Electric Power. It trades about 0.23 of its potential returns per unit of risk. American Electric Power is currently generating about 0.2 per unit of risk. If you would invest  1,066  in Endesa SA ADR on December 29, 2024 and sell it today you would earn a total of  244.00  from holding Endesa SA ADR or generate 22.89% return on investment over 90 days.

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

Endesa SA ADR  vs.  American Electric Power

Endesa SA ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Endesa SA ADR are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Endesa SA showed solid returns over the last few months and may actually be approaching a breakup point.

American Electric Power

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating technical and fundamental indicators, American Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Endesa SA and American Electric

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

The idea behind Endesa SA ADR and American Electric Power 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.