Correlation Between London Stock and Centrica PLC

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

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

Diversification Opportunities for London Stock and Centrica PLC

0.23

Correlation Coefficient

London Stock  Centrica PLC

Modest diversification

The 3 months correlation between London and Centrica is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding London Stock Exchange and Centrica PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Centrica PLC and London Stock 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 London Stock Exchange are associated (or correlated) with Centrica PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Centrica PLC has no effect on the direction of London Stock i.e., London Stock and Centrica PLC go up and down completely randomly.

Pair Corralation between London Stock and Centrica PLC

Assuming the 90 days trading horizon London Stock is expected to generate 1.02 times less return on investment than Centrica PLC. But when comparing it to its historical volatility, London Stock Exchange is 1.96 times less risky than Centrica PLC. It trades about 0.23 of its potential returns per unit of risk. Centrica PLC is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  12,040  in Centrica PLC on September 21, 2024 and sell it today you would earn a total of  455.00  from holding Centrica PLC or generate 3.78% return on investment over 90 days.

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

London Stock Exchange  vs.  Centrica PLC

London Stock Exchange

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, London Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Centrica PLC

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Centrica PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Centrica PLC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with London Stock and Centrica PLC

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

The idea behind London Stock Exchange and Centrica 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.

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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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.