Correlation Between American Electric and Diversified Energy
Can any of the company-specific risk be diversified away by investing in both American Electric and Diversified 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 American Electric and Diversified Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Electric Power and Diversified Energy, you can compare the effects of market volatilities on American Electric and Diversified 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 American Electric with a short position of Diversified Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Diversified Energy.
Diversification Opportunities for American Electric and Diversified Energy
-0.47 | Correlation Coefficient |
Very good diversification
The 3 months correlation between American and Diversified is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Diversified Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Energy and American Electric 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 American Electric Power are associated (or correlated) with Diversified Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Energy has no effect on the direction of American Electric i.e., American Electric and Diversified Energy go up and down completely randomly.
Pair Corralation between American Electric and Diversified Energy
Assuming the 90 days trading horizon American Electric is expected to generate 15.21 times less return on investment than Diversified Energy. But when comparing it to its historical volatility, American Electric Power is 2.38 times less risky than Diversified Energy. It trades about 0.06 of its potential returns per unit of risk. Diversified Energy is currently generating about 0.41 of returns per unit of risk over similar time horizon. If you would invest 93,479 in Diversified Energy on September 4, 2024 and sell it today you would earn a total of 30,021 from holding Diversified Energy or generate 32.12% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
American Electric Power vs. Diversified Energy
Performance |
| Timeline |
| American Electric Power |
| Diversified Energy |
American Electric and Diversified Energy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Electric and Diversified Energy
The main advantage of trading using opposite American Electric and Diversified Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Diversified 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 Diversified Energy will offset losses from the drop in Diversified Energy's long position.| American Electric vs. Diversified Energy | American Electric vs. Morgan Advanced Materials | American Electric vs. Taylor Maritime Investments | American Electric vs. New Residential Investment |
| Diversified Energy vs. Zoom Video Communications | Diversified Energy vs. Enbridge | Diversified Energy vs. Endo International PLC | Diversified Energy vs. DXC Technology Co |
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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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