Correlation Between American Water and Essential Utilities
Can any of the company-specific risk be diversified away by investing in both American Water and Essential Utilities 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 Water and Essential Utilities into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Water Works and Essential Utilities, you can compare the effects of market volatilities on American Water and Essential Utilities 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 Water with a short position of Essential Utilities. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Water and Essential Utilities.
Diversification Opportunities for American Water and Essential Utilities
-0.13 | Correlation Coefficient |
Good diversification
The 3 months correlation between American and Essential is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding American Water Works and Essential Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essential Utilities and American 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 American Water Works are associated (or correlated) with Essential Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essential Utilities has no effect on the direction of American Water i.e., American Water and Essential Utilities go up and down completely randomly.
Pair Corralation between American Water and Essential Utilities
Considering the 90-day investment horizon American Water Works is expected to under-perform the Essential Utilities. But the stock apears to be less risky and, when comparing its historical volatility, American Water Works is 1.02 times less risky than Essential Utilities. The stock trades about -0.03 of its potential returns per unit of risk. The Essential Utilities is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 3,911 in Essential Utilities on August 25, 2024 and sell it today you would earn a total of 42.00 from holding Essential Utilities or generate 1.07% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
American Water Works vs. Essential Utilities
Performance |
| Timeline |
| American Water Works |
| Essential Utilities |
American Water and Essential Utilities Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Water and Essential Utilities
The main advantage of trading using opposite American Water and Essential Utilities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Water position performs unexpectedly, Essential Utilities 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 Essential Utilities will offset losses from the drop in Essential Utilities' long position.| American Water vs. California Water Service | American Water vs. Middlesex Water | American Water vs. American States Water | American Water vs. The York Water |
| Essential Utilities vs. American States Water | Essential Utilities vs. California Water Service | Essential Utilities vs. Consolidated Water Co | Essential Utilities vs. SJW Group Common |
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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