Correlation Between American States and United Utilities

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

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

Diversification Opportunities for American States and United Utilities

0.61

Correlation Coefficient

American States  United Utilities

Poor diversification

The 3 months correlation between American and United is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding American States Water and United Utilities Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Utilities and American States 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 American States Water 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 American States i.e., American States and United Utilities go up and down completely randomly.

Pair Corralation between American States and United Utilities

Assuming the 90 days horizon American States Water is expected to under-perform the United Utilities. But the stock apears to be less risky and, when comparing its historical volatility, American States Water is 1.16 times less risky than United Utilities. The stock trades about -0.01 of its potential returns per unit of risk. The United Utilities Group is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,035  in United Utilities Group on September 22, 2024 and sell it today you would earn a total of  225.00  from holding United Utilities Group or generate 21.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.8%
Values	Daily Returns

American States Water  vs.  United Utilities Group

American States Water

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American States Water are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, American States is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

United Utilities

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in United Utilities Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, United Utilities is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with American States and United Utilities

The main advantage of trading using opposite American States and United Utilities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American States 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 American States Water 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.

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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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.