Correlation Between American Electric and Dominion Energy

Can any of the company-specific risk be diversified away by investing in both American Electric and Dominion 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 Dominion 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 Dominion Energy, you can compare the effects of market volatilities on American Electric and Dominion 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 Dominion Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Electric and Dominion Energy.

Diversification Opportunities for American Electric and Dominion Energy

0.19

Correlation Coefficient

American Electric  Dominion Energy

Average diversification

The 3 months correlation between American and Dominion is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Dominion Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dominion 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 Dominion Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dominion Energy has no effect on the direction of American Electric i.e., American Electric and Dominion Energy go up and down completely randomly.

Pair Corralation between American Electric and Dominion Energy

Considering the 90-day investment horizon American Electric is expected to generate 7.15 times less return on investment than Dominion Energy. But when comparing it to its historical volatility, American Electric Power is 1.15 times less risky than Dominion Energy. It trades about 0.01 of its potential returns per unit of risk. Dominion Energy is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,590  in Dominion Energy on August 30, 2024 and sell it today you would earn a total of  380.00  from holding Dominion Energy or generate 6.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

American Electric Power  vs.  Dominion Energy

American Electric Power

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical and fundamental indicators, American Electric is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Dominion Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dominion Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating fundamental indicators, Dominion Energy may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with American Electric and Dominion Energy

The main advantage of trading using opposite American Electric and Dominion Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Electric position performs unexpectedly, Dominion 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 Dominion Energy will offset losses from the drop in Dominion Energy's long position.

The idea behind American Electric Power and Dominion Energy pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.