Correlation Between American Electric and Edison International
Can any of the company-specific risk be diversified away by investing in both American Electric and Edison International 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 Edison International 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 Edison International, you can compare the effects of market volatilities on American Electric and Edison International 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 Edison International. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Edison International.
Diversification Opportunities for American Electric and Edison International
0.56 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between American and Edison is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Edison International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Edison International 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 Edison International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Edison International has no effect on the direction of American Electric i.e., American Electric and Edison International go up and down completely randomly.
Pair Corralation between American Electric and Edison International
Considering the 90-day investment horizon American Electric is expected to generate 3.02 times less return on investment than Edison International. But when comparing it to its historical volatility, American Electric Power is 1.01 times less risky than Edison International. It trades about 0.02 of its potential returns per unit of risk. Edison International is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest 6,056 in Edison International on August 27, 2024 and sell it today you would earn a total of 2,592 from holding Edison International or generate 42.8% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
American Electric Power vs. Edison International
Performance |
| Timeline |
| American Electric Power |
| Edison International |
American Electric and Edison International Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Electric and Edison International
The main advantage of trading using opposite American Electric and Edison International positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Edison International 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 Edison International will offset losses from the drop in Edison International's long position.| American Electric vs. Southern Company | American Electric vs. Dominion Energy | American Electric vs. Nextera Energy | American Electric vs. Consolidated Edison |
| Edison International vs. Southern Company | Edison International vs. American Electric Power | Edison International vs. Duke Energy | Edison International vs. Dominion Energy |
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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.
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