Correlation Between NRG Energy and Summit Midstream

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

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

Diversification Opportunities for NRG Energy and Summit Midstream

0.65

Correlation Coefficient

NRG Energy  Summit Midstream

Poor diversification

The 3 months correlation between NRG and Summit is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding NRG Energy and Summit Midstream in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Summit Midstream 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 Summit Midstream. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Summit Midstream has no effect on the direction of NRG Energy i.e., NRG Energy and Summit Midstream go up and down completely randomly.

Pair Corralation between NRG Energy and Summit Midstream

Considering the 90-day investment horizon NRG Energy is expected to generate 1.18 times more return on investment than Summit Midstream. However, NRG Energy is 1.18 times more volatile than Summit Midstream. It trades about 0.06 of its potential returns per unit of risk. Summit Midstream is currently generating about 0.05 per unit of risk. If you would invest  7,779  in NRG Energy on October 4, 2024 and sell it today you would earn a total of  1,243  from holding NRG Energy or generate 15.98% 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.  Summit Midstream

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.

Summit Midstream

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Summit Midstream are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, Summit Midstream is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with NRG Energy and Summit Midstream

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

The idea behind NRG Energy and Summit Midstream 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.