Correlation Between Southern and Otter Tail

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

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

Diversification Opportunities for Southern and Otter Tail

0.83

Correlation Coefficient

Southern  Otter Tail

Very poor diversification

The 3 months correlation between Southern and Otter is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and Otter Tail in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Otter Tail 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 Otter Tail. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Otter Tail has no effect on the direction of Southern i.e., Southern and Otter Tail go up and down completely randomly.

Pair Corralation between Southern and Otter Tail

Allowing for the 90-day total investment horizon Southern Company is expected to generate 0.77 times more return on investment than Otter Tail. However, Southern Company is 1.31 times less risky than Otter Tail. It trades about 0.01 of its potential returns per unit of risk. Otter Tail is currently generating about 0.01 per unit of risk. If you would invest  8,838  in Southern Company on November 28, 2024 and sell it today you would earn a total of  37.00  from holding Southern Company or generate 0.42% return on investment over 90 days.

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

Southern Company  vs.  Otter Tail

Southern

Risk-Adjusted Performance

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 very healthy basic indicators, Southern is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Otter Tail

Risk-Adjusted Performance

Very Weak

Over the last 90 days Otter Tail has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Otter Tail is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Southern and Otter Tail

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

The idea behind Southern Company and Otter Tail 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.