Correlation Between NRG Energy, and Verizon Communications

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

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

Diversification Opportunities for NRG Energy, and Verizon Communications

0.7

Correlation Coefficient

NRG Energy,  Verizon Communications

Poor diversification

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

Pair Corralation between NRG Energy, and Verizon Communications

Assuming the 90 days trading horizon NRG Energy, is expected to generate 0.97 times more return on investment than Verizon Communications. However, NRG Energy, is 1.03 times less risky than Verizon Communications. It trades about -0.22 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.24 per unit of risk. If you would invest  60,780  in NRG Energy, on October 4, 2024 and sell it today you would lose (4,180) from holding NRG Energy, or give up 6.88% of portfolio value over 90 days.

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

NRG Energy,  vs.  Verizon Communications

NRG Energy,

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy, are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, NRG Energy, may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Verizon Communications

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with NRG Energy, and Verizon Communications

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

The idea behind NRG Energy, and Verizon Communications 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.