Correlation Between Penn National and NRG ENERGY

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

By analyzing existing cross correlation between Penn National Gaming and NRG ENERGY, you can compare the effects of market volatilities on Penn National and NRG ENERGY 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 Penn National with a short position of NRG ENERGY. Check out your portfolio center. Please also check ongoing floating volatility patterns of Penn National and NRG ENERGY.

Diversification Opportunities for Penn National and NRG ENERGY

0.77

Correlation Coefficient

Penn National  NRG ENERGY

Poor diversification

The 3 months correlation between Penn and NRG is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Penn National Gaming and NRG ENERGY in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NRG ENERGY and Penn National 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 Penn National Gaming are associated (or correlated) with NRG ENERGY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NRG ENERGY has no effect on the direction of Penn National i.e., Penn National and NRG ENERGY go up and down completely randomly.

Pair Corralation between Penn National and NRG ENERGY

Given the investment horizon of 90 days Penn National Gaming is expected to under-perform the NRG ENERGY. But the stock apears to be less risky and, when comparing its historical volatility, Penn National Gaming is 1.36 times less risky than NRG ENERGY. The stock trades about -0.04 of its potential returns per unit of risk. The NRG ENERGY is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  8,604  in NRG ENERGY on December 19, 2024 and sell it today you would earn a total of  36.00  from holding NRG ENERGY or generate 0.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.33%
Values	Daily Returns

Penn National Gaming  vs.  NRG ENERGY

Penn National Gaming

Risk-Adjusted Performance

Very Weak

Over the last 90 days Penn National Gaming has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

NRG ENERGY

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NRG ENERGY are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, NRG ENERGY is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Penn National and NRG ENERGY

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

The idea behind Penn National Gaming and NRG ENERGY 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.