Correlation Between Watts Water and American Superconductor

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

By analyzing existing cross correlation between Watts Water Technologies and American Superconductor, you can compare the effects of market volatilities on Watts Water and American Superconductor 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 Watts Water with a short position of American Superconductor. Check out your portfolio center. Please also check ongoing floating volatility patterns of Watts Water and American Superconductor.

Diversification Opportunities for Watts Water and American Superconductor

0.65

Correlation Coefficient

Watts Water  American Superconductor

Poor diversification

The 3 months correlation between Watts and American is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Watts Water Technologies and American Superconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Superconductor and Watts Water 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 Watts Water Technologies are associated (or correlated) with American Superconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Superconductor has no effect on the direction of Watts Water i.e., Watts Water and American Superconductor go up and down completely randomly.

Pair Corralation between Watts Water and American Superconductor

Considering the 90-day investment horizon Watts Water is expected to generate 2.99 times less return on investment than American Superconductor. But when comparing it to its historical volatility, Watts Water Technologies is 4.32 times less risky than American Superconductor. It trades about 0.15 of its potential returns per unit of risk. American Superconductor is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,144  in American Superconductor on September 13, 2024 and sell it today you would earn a total of  737.00  from holding American Superconductor or generate 34.38% return on investment over 90 days.

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

Watts Water Technologies  vs.  American Superconductor

Watts Water Technologies

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Watts Water Technologies are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Watts Water unveiled solid returns over the last few months and may actually be approaching a breakup point.

American Superconductor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Superconductor are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, American Superconductor exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Watts Water and American Superconductor

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

The idea behind Watts Water Technologies and American Superconductor 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.