Correlation Between Centrica Plc and NRG Energy

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

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

Diversification Opportunities for Centrica Plc and NRG Energy

-0.03

Correlation Coefficient

Centrica Plc  NRG Energy

Good diversification

The 3 months correlation between Centrica and NRG is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Centrica plc and NRG Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NRG Energy and Centrica Plc 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 Centrica plc are associated (or correlated) with NRG Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NRG Energy has no effect on the direction of Centrica Plc i.e., Centrica Plc and NRG Energy go up and down completely randomly.

Pair Corralation between Centrica Plc and NRG Energy

Assuming the 90 days horizon Centrica plc is expected to generate 1.24 times more return on investment than NRG Energy. However, Centrica Plc is 1.24 times more volatile than NRG Energy. It trades about -0.13 of its potential returns per unit of risk. NRG Energy is currently generating about -0.23 per unit of risk. If you would invest  154.00  in Centrica plc on October 1, 2024 and sell it today you would lose (8.00) from holding Centrica plc or give up 5.19% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Centrica plc  vs.  NRG Energy

Centrica plc

Risk-Adjusted Performance

0 of 100

Very Weak

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

NRG Energy

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Centrica Plc and NRG Energy

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

The idea behind Centrica plc and NRG 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.