Correlation Between American Electric and Xcel Energy
Can any of the company-specific risk be diversified away by investing in both American Electric and Xcel 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 Xcel 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 Xcel Energy, you can compare the effects of market volatilities on American Electric and Xcel 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 Xcel Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Xcel Energy.
Diversification Opportunities for American Electric and Xcel Energy
-0.37 | Correlation Coefficient |
Very good diversification
The 3 months correlation between American and Xcel is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Xcel Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xcel 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 Xcel Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xcel Energy has no effect on the direction of American Electric i.e., American Electric and Xcel Energy go up and down completely randomly.
Pair Corralation between American Electric and Xcel Energy
Considering the 90-day investment horizon American Electric Power is expected to under-perform the Xcel Energy. But the stock apears to be less risky and, when comparing its historical volatility, American Electric Power is 1.01 times less risky than Xcel Energy. The stock trades about -0.01 of its potential returns per unit of risk. The Xcel Energy is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest 6,448 in Xcel Energy on August 27, 2024 and sell it today you would earn a total of 687.00 from holding Xcel Energy or generate 10.65% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
American Electric Power vs. Xcel Energy
Performance |
| Timeline |
| American Electric Power |
| Xcel Energy |
American Electric and Xcel Energy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Electric and Xcel Energy
The main advantage of trading using opposite American Electric and Xcel Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Xcel 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 Xcel Energy will offset losses from the drop in Xcel Energy's long position.| American Electric vs. Southern Company | American Electric vs. Dominion Energy | American Electric vs. Nextera Energy | American Electric vs. Consolidated Edison |
| Xcel Energy vs. Alliant Energy Corp | Xcel Energy vs. Entergy | Xcel Energy vs. Pinnacle West Capital | Xcel Energy vs. CMS 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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