Correlation Between Southern and CMS Energy

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

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

Diversification Opportunities for Southern and CMS Energy

0.9

Correlation Coefficient

Southern  CMS Energy

Almost no diversification

The 3 months correlation between Southern and CMS is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and CMS Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMS Energy and Southern 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 Southern Company are associated (or correlated) with CMS Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMS Energy has no effect on the direction of Southern i.e., Southern and CMS Energy go up and down completely randomly.

Pair Corralation between Southern and CMS Energy

Allowing for the 90-day total investment horizon Southern is expected to generate 2.44 times less return on investment than CMS Energy. In addition to that, Southern is 1.17 times more volatile than CMS Energy. It trades about 0.03 of its total potential returns per unit of risk. CMS Energy is currently generating about 0.1 per unit of volatility. If you would invest  6,046  in CMS Energy on September 21, 2024 and sell it today you would earn a total of  598.00  from holding CMS Energy or generate 9.89% return on investment over 90 days.

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

Southern Company  vs.  CMS Energy

Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak 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.

CMS Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CMS Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable primary indicators, CMS Energy is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Southern and CMS Energy

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

The idea behind Southern Company and CMS 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.