Correlation Between American Express and Essential Energy

Can any of the company-specific risk be diversified away by investing in both American Express and Essential 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 Express and Essential Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between American Express and Essential Energy Services, you can compare the effects of market volatilities on American Express and Essential 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 Express with a short position of Essential Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Express and Essential Energy.

Diversification Opportunities for American Express and Essential Energy

0.74

Correlation Coefficient

American Express  Essential Energy

Poor diversification

The 3 months correlation between American and Essential is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding American Express and Essential Energy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essential Energy Services and American Express 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 Express are associated (or correlated) with Essential Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essential Energy Services has no effect on the direction of American Express i.e., American Express and Essential Energy go up and down completely randomly.

Pair Corralation between American Express and Essential Energy

If you would invest  25,449  in American Express on September 12, 2024 and sell it today you would earn a total of  4,762  from holding American Express or generate 18.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	1.56%
Values	Daily Returns

American Express  vs.  Essential Energy Services

American Express

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Express are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, American Express reported solid returns over the last few months and may actually be approaching a breakup point.

Essential Energy Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Essential Energy Services has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Essential Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with American Express and Essential Energy

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

The idea behind American Express and Essential Energy Services 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.