Correlation Between Reliance Steel and NRG Energy

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

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

Diversification Opportunities for Reliance Steel and NRG Energy

0.84

Correlation Coefficient

Reliance Steel  NRG Energy

Very poor diversification

The 3 months correlation between Reliance and NRG is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Steel Aluminum and NRG Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NRG Energy and Reliance Steel 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 Reliance Steel Aluminum 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 Reliance Steel i.e., Reliance Steel and NRG Energy go up and down completely randomly.

Pair Corralation between Reliance Steel and NRG Energy

Assuming the 90 days horizon Reliance Steel Aluminum is expected to under-perform the NRG Energy. But the stock apears to be less risky and, when comparing its historical volatility, Reliance Steel Aluminum is 1.69 times less risky than NRG Energy. The stock trades about -0.44 of its potential returns per unit of risk. The NRG Energy is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  8,932  in NRG Energy on September 22, 2024 and sell it today you would lose (428.00) from holding NRG Energy or give up 4.79% of portfolio value over 90 days.

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

Reliance Steel Aluminum  vs.  NRG Energy

Reliance Steel Aluminum

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Reliance Steel Aluminum are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Reliance Steel is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

NRG Energy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, NRG Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Reliance Steel and NRG Energy

The main advantage of trading using opposite Reliance Steel and NRG Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Reliance Steel 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 Reliance Steel Aluminum 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.

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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.