Correlation Between NRG Energy and Melrose Industries

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

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

Diversification Opportunities for NRG Energy and Melrose Industries

0.71

Correlation Coefficient

NRG Energy  Melrose Industries

Poor diversification

The 3 months correlation between NRG and Melrose is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding NRG Energy and Melrose Industries PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melrose Industries PLC 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 Melrose Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melrose Industries PLC has no effect on the direction of NRG Energy i.e., NRG Energy and Melrose Industries go up and down completely randomly.

Pair Corralation between NRG Energy and Melrose Industries

Considering the 90-day investment horizon NRG Energy is expected to generate 0.56 times more return on investment than Melrose Industries. However, NRG Energy is 1.78 times less risky than Melrose Industries. It trades about 0.14 of its potential returns per unit of risk. Melrose Industries PLC is currently generating about 0.04 per unit of risk. If you would invest  4,504  in NRG Energy on October 8, 2024 and sell it today you would earn a total of  5,346  from holding NRG Energy or generate 118.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	72.22%
Values	Daily Returns

NRG Energy  vs.  Melrose Industries PLC

NRG Energy

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, NRG Energy may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Melrose Industries PLC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Melrose Industries PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Melrose Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NRG Energy and Melrose Industries

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

The idea behind NRG Energy and Melrose Industries 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.