Correlation Between MGE Energy and PNM Resources

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

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

Diversification Opportunities for MGE Energy and PNM Resources

0.82

Correlation Coefficient

MGE Energy  PNM Resources

Very poor diversification

The 3 months correlation between MGE and PNM is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding MGE Energy and PNM Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PNM Resources and MGE Energy 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 MGE Energy are associated (or correlated) with PNM Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PNM Resources has no effect on the direction of MGE Energy i.e., MGE Energy and PNM Resources go up and down completely randomly.

Pair Corralation between MGE Energy and PNM Resources

Given the investment horizon of 90 days MGE Energy is expected to generate 1.99 times more return on investment than PNM Resources. However, MGE Energy is 1.99 times more volatile than PNM Resources. It trades about 0.2 of its potential returns per unit of risk. PNM Resources is currently generating about 0.22 per unit of risk. If you would invest  8,596  in MGE Energy on August 31, 2024 and sell it today you would earn a total of  1,880  from holding MGE Energy or generate 21.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	39.68%
Values	Daily Returns

MGE Energy  vs.  PNM Resources

MGE Energy

Risk-Adjusted Performance

16 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MGE Energy are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, MGE Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

PNM Resources

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days PNM Resources has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very weak basic indicators, PNM Resources may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with MGE Energy and PNM Resources

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

The idea behind MGE Energy and PNM Resources 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.