Correlation Between Red Electrica and Consumers Energy

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

By analyzing existing cross correlation between Red Electrica Corporacion and Consumers Energy, you can compare the effects of market volatilities on Red Electrica and Consumers 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 Red Electrica with a short position of Consumers Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Red Electrica and Consumers Energy.

Diversification Opportunities for Red Electrica and Consumers Energy

0.61

Correlation Coefficient

Red Electrica  Consumers Energy

Poor diversification

The 3 months correlation between Red and Consumers is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Red Electrica Corporacion and Consumers Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumers Energy and Red Electrica 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 Red Electrica Corporacion are associated (or correlated) with Consumers Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumers Energy has no effect on the direction of Red Electrica i.e., Red Electrica and Consumers Energy go up and down completely randomly.

Pair Corralation between Red Electrica and Consumers Energy

Assuming the 90 days horizon Red Electrica Corporacion is expected to under-perform the Consumers Energy. But the pink sheet apears to be less risky and, when comparing its historical volatility, Red Electrica Corporacion is 1.15 times less risky than Consumers Energy. The pink sheet trades about -0.04 of its potential returns per unit of risk. The Consumers Energy is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  8,038  in Consumers Energy on November 19, 2024 and sell it today you would lose (189.00) from holding Consumers Energy or give up 2.35% of portfolio value over 90 days.

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

Red Electrica Corporacion  vs.  Consumers Energy

Red Electrica Corporacion

Risk-Adjusted Performance

Very Weak

Over the last 90 days Red Electrica Corporacion has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong forward indicators, Red Electrica is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Consumers Energy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Consumers Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Consumers Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Red Electrica and Consumers Energy

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

The idea behind Red Electrica Corporacion and Consumers 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.