Correlation Between Prairie Provident and Southern Energy

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

By analyzing existing cross correlation between Prairie Provident Resources and Southern Energy Corp, you can compare the effects of market volatilities on Prairie Provident and Southern 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 Prairie Provident with a short position of Southern Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Prairie Provident and Southern Energy.

Diversification Opportunities for Prairie Provident and Southern Energy

0.85

Correlation Coefficient

Prairie Provident  Southern Energy

Very poor diversification

The 3 months correlation between Prairie and Southern is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Prairie Provident Resources and Southern Energy Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern Energy Corp and Prairie Provident 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 Prairie Provident Resources are associated (or correlated) with Southern Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern Energy Corp has no effect on the direction of Prairie Provident i.e., Prairie Provident and Southern Energy go up and down completely randomly.

Pair Corralation between Prairie Provident and Southern Energy

Assuming the 90 days trading horizon Prairie Provident Resources is expected to generate 1.39 times more return on investment than Southern Energy. However, Prairie Provident is 1.39 times more volatile than Southern Energy Corp. It trades about 0.14 of its potential returns per unit of risk. Southern Energy Corp is currently generating about 0.08 per unit of risk. If you would invest  3.00  in Prairie Provident Resources on October 26, 2024 and sell it today you would earn a total of  2.50  from holding Prairie Provident Resources or generate 83.33% return on investment over 90 days.

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

Prairie Provident Resources  vs.  Southern Energy Corp

Prairie Provident

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prairie Provident Resources are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Prairie Provident displayed solid returns over the last few months and may actually be approaching a breakup point.

Southern Energy Corp

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Energy Corp are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Southern Energy showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Prairie Provident and Southern Energy

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

The idea behind Prairie Provident Resources and Southern Energy Corp 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.