Correlation Between SOUTHERN and NRG Energy

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

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

Diversification Opportunities for SOUTHERN and NRG Energy

-0.25

Correlation Coefficient

SOUTHERN  NRG Energy

Very good diversification

The 3 months correlation between SOUTHERN and NRG is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding SOUTHERN PER CORP and NRG Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NRG 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 PER CORP 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 SOUTHERN i.e., SOUTHERN and NRG Energy go up and down completely randomly.

Pair Corralation between SOUTHERN and NRG Energy

Assuming the 90 days trading horizon SOUTHERN is expected to generate 86.79 times less return on investment than NRG Energy. But when comparing it to its historical volatility, SOUTHERN PER CORP is 2.27 times less risky than NRG Energy. It trades about 0.0 of its potential returns per unit of risk. NRG Energy is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,988  in NRG Energy on October 4, 2024 and sell it today you would earn a total of  6,034  from holding NRG Energy or generate 201.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	77.42%
Values	Daily Returns

SOUTHERN PER CORP  vs.  NRG Energy

SOUTHERN PER P

Risk-Adjusted Performance

0 of 100

Very Weak

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

NRG Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NRG Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, NRG Energy is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with SOUTHERN and NRG Energy

The main advantage of trading using opposite SOUTHERN and NRG Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SOUTHERN 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 SOUTHERN PER CORP 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.