Correlation Between FirstEnergy and EuroSite Power

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

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

Diversification Opportunities for FirstEnergy and EuroSite Power

0.21

Correlation Coefficient

FirstEnergy  EuroSite Power

Modest diversification

The 3 months correlation between FirstEnergy and EuroSite is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding FirstEnergy and EuroSite Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EuroSite Power and FirstEnergy 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 FirstEnergy are associated (or correlated) with EuroSite Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EuroSite Power has no effect on the direction of FirstEnergy i.e., FirstEnergy and EuroSite Power go up and down completely randomly.

Pair Corralation between FirstEnergy and EuroSite Power

Allowing for the 90-day total investment horizon FirstEnergy is expected to generate 6.36 times less return on investment than EuroSite Power. But when comparing it to its historical volatility, FirstEnergy is 3.82 times less risky than EuroSite Power. It trades about 0.02 of its potential returns per unit of risk. EuroSite Power is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  5.00  in EuroSite Power on December 21, 2024 and sell it today you would earn a total of  0.00  from holding EuroSite Power or generate 0.0% return on investment over 90 days.

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

FirstEnergy  vs.  EuroSite Power

FirstEnergy

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in FirstEnergy are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, FirstEnergy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

EuroSite Power

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in EuroSite Power are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, EuroSite Power reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with FirstEnergy and EuroSite Power

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

The idea behind FirstEnergy and EuroSite 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.