Correlation Between CBOE SP and CenterPoint Energy

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

By analyzing existing cross correlation between CBOE SP 500 and CenterPoint Energy, you can compare the effects of market volatilities on CBOE SP and CenterPoint 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 CBOE SP with a short position of CenterPoint Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of CBOE SP and CenterPoint Energy.

Diversification Opportunities for CBOE SP and CenterPoint Energy

0.87

Correlation Coefficient

CBOE SP  CenterPoint Energy

Very poor diversification

The 3 months correlation between CBOE and CenterPoint is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding CBOE SP 500 and CenterPoint Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CenterPoint Energy and CBOE SP 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 CBOE SP 500 are associated (or correlated) with CenterPoint Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CenterPoint Energy has no effect on the direction of CBOE SP i.e., CBOE SP and CenterPoint Energy go up and down completely randomly.

Pair Corralation between CBOE SP and CenterPoint Energy

Assuming the 90 days trading horizon CBOE SP is expected to generate 1.83 times less return on investment than CenterPoint Energy. But when comparing it to its historical volatility, CBOE SP 500 is 2.38 times less risky than CenterPoint Energy. It trades about 0.23 of its potential returns per unit of risk. CenterPoint Energy is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  2,802  in CenterPoint Energy on September 15, 2024 and sell it today you would earn a total of  392.00  from holding CenterPoint Energy or generate 13.99% return on investment over 90 days.

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

CBOE SP 500  vs.  CenterPoint Energy

Pair Trading with CBOE SP and CenterPoint Energy

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

The idea behind CBOE SP 500 and CenterPoint 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.

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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.