Correlation Between NRG Energy and Aris Water

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

By analyzing existing cross correlation between NRG Energy and Aris Water Solutions, you can compare the effects of market volatilities on NRG Energy and Aris Water 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 Aris Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of NRG Energy and Aris Water.

Diversification Opportunities for NRG Energy and Aris Water

0.74

Correlation Coefficient

NRG Energy  Aris Water

Poor diversification

The 3 months correlation between NRG and Aris is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding NRG Energy and Aris Water Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aris Water Solutions 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 Aris Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aris Water Solutions has no effect on the direction of NRG Energy i.e., NRG Energy and Aris Water go up and down completely randomly.

Pair Corralation between NRG Energy and Aris Water

Considering the 90-day investment horizon NRG Energy is expected to generate 0.56 times more return on investment than Aris Water. However, NRG Energy is 1.79 times less risky than Aris Water. It trades about 0.12 of its potential returns per unit of risk. Aris Water Solutions is currently generating about 0.05 per unit of risk. If you would invest  2,988  in NRG Energy on October 4, 2024 and sell it today you would earn a total of  6,034  from holding NRG Energy or generate 201.94% return on investment over 90 days.

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

NRG Energy  vs.  Aris Water Solutions

NRG Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NRG Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, NRG Energy is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Aris Water Solutions

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Aris Water Solutions are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak forward indicators, Aris Water unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NRG Energy and Aris Water

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

The idea behind NRG Energy and Aris Water Solutions 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.