Correlation Between Northwest Natural and Chesapeake Utilities

Can any of the company-specific risk be diversified away by investing in both Northwest Natural and Chesapeake Utilities 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 Northwest Natural and Chesapeake Utilities into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northwest Natural Gas and Chesapeake Utilities, you can compare the effects of market volatilities on Northwest Natural and Chesapeake Utilities 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 Northwest Natural with a short position of Chesapeake Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northwest Natural and Chesapeake Utilities.

Diversification Opportunities for Northwest Natural and Chesapeake Utilities

0.95

Correlation Coefficient

Northwest Natural  Chesapeake Utilities

Almost no diversification

The 3 months correlation between Northwest and Chesapeake is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Northwest Natural Gas and Chesapeake Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chesapeake Utilities and Northwest Natural 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 Northwest Natural Gas are associated (or correlated) with Chesapeake Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chesapeake Utilities has no effect on the direction of Northwest Natural i.e., Northwest Natural and Chesapeake Utilities go up and down completely randomly.

Pair Corralation between Northwest Natural and Chesapeake Utilities

Considering the 90-day investment horizon Northwest Natural Gas is expected to under-perform the Chesapeake Utilities. But the stock apears to be less risky and, when comparing its historical volatility, Northwest Natural Gas is 1.06 times less risky than Chesapeake Utilities. The stock trades about -0.04 of its potential returns per unit of risk. The Chesapeake Utilities is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  13,109  in Chesapeake Utilities on November 28, 2024 and sell it today you would lose (451.00) from holding Chesapeake Utilities or give up 3.44% of portfolio value over 90 days.

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

Northwest Natural Gas  vs.  Chesapeake Utilities

Northwest Natural Gas

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northwest Natural Gas has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Northwest Natural is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Chesapeake Utilities

Risk-Adjusted Performance

Very Weak

Over the last 90 days Chesapeake Utilities has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Chesapeake Utilities is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Northwest Natural and Chesapeake Utilities

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

The idea behind Northwest Natural Gas and Chesapeake Utilities 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.