Correlation Between American Electric and DTE Energy

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

Diversification Opportunities for American Electric and DTE Energy

0.56

Correlation Coefficient

American Electric  DTE Energy

Very weak diversification

The 3 months correlation between American and DTE is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and DTE Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DTE 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 DTE Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DTE Energy has no effect on the direction of American Electric i.e., American Electric and DTE Energy go up and down completely randomly.

Pair Corralation between American Electric and DTE Energy

Considering the 90-day investment horizon American Electric is expected to generate 1.17 times less return on investment than DTE Energy. In addition to that, American Electric is 1.05 times more volatile than DTE Energy. It trades about 0.02 of its total potential returns per unit of risk. DTE Energy is currently generating about 0.03 per unit of volatility. If you would invest  11,203  in DTE Energy on August 31, 2024 and sell it today you would earn a total of  1,405  from holding DTE Energy or generate 12.54% 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.  DTE Energy

American Electric Power

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days American Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, American Electric is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

DTE Energy

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in DTE Energy are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, DTE Energy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with American Electric and DTE Energy

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

The idea behind American Electric Power and DTE 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.