Correlation Between Essential Utilities and American Water
Can any of the company-specific risk be diversified away by investing in both Essential Utilities and American Water 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 Essential Utilities and American Water into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Essential Utilities and American Water Works, you can compare the effects of market volatilities on Essential Utilities and American Water 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 Essential Utilities with a short position of American Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Essential Utilities and American Water.
Diversification Opportunities for Essential Utilities and American Water
0.89 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Essential and American is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Essential Utilities and American Water Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Water Works and Essential Utilities 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 Essential Utilities are associated (or correlated) with American Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Water Works has no effect on the direction of Essential Utilities i.e., Essential Utilities and American Water go up and down completely randomly.
Pair Corralation between Essential Utilities and American Water
Given the investment horizon of 90 days Essential Utilities is expected to generate 1.1 times less return on investment than American Water. In addition to that, Essential Utilities is 1.03 times more volatile than American Water Works. It trades about 0.02 of its total potential returns per unit of risk. American Water Works is currently generating about 0.02 per unit of volatility. If you would invest 12,018 in American Water Works on November 5, 2024 and sell it today you would earn a total of 446.00 from holding American Water Works or generate 3.71% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Essential Utilities vs. American Water Works
Performance |
| Timeline |
| Essential Utilities |
| American Water Works |
Essential Utilities and American Water Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Essential Utilities and American Water
The main advantage of trading using opposite Essential Utilities and American Water positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Essential Utilities position performs unexpectedly, American Water 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 Water will offset losses from the drop in American Water's long position.| Essential Utilities vs. American States Water | Essential Utilities vs. California Water Service | Essential Utilities vs. Consolidated Water Co | Essential Utilities vs. SJW Group Common |
| American Water vs. California Water Service | American Water vs. Middlesex Water | American Water vs. American States Water | American Water vs. The York Water |
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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.
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