Correlation Between NRG Energy and Southwest Gas

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

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

Diversification Opportunities for NRG Energy and Southwest Gas

0.68

Correlation Coefficient

NRG Energy  Southwest Gas

Poor diversification

The 3 months correlation between NRG and Southwest is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding NRG Energy and Southwest Gas Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Gas Holdings 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 Southwest Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Gas Holdings has no effect on the direction of NRG Energy i.e., NRG Energy and Southwest Gas go up and down completely randomly.

Pair Corralation between NRG Energy and Southwest Gas

Considering the 90-day investment horizon NRG Energy is expected to generate 1.52 times more return on investment than Southwest Gas. However, NRG Energy is 1.52 times more volatile than Southwest Gas Holdings. It trades about 0.13 of its potential returns per unit of risk. Southwest Gas Holdings is currently generating about 0.06 per unit of risk. If you would invest  4,825  in NRG Energy on September 15, 2024 and sell it today you would earn a total of  4,673  from holding NRG Energy or generate 96.85% 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.  Southwest Gas Holdings

NRG Energy

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, NRG Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Southwest Gas Holdings

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Gas Holdings are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Southwest Gas is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with NRG Energy and Southwest Gas

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

The idea behind NRG Energy and Southwest Gas Holdings 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.