Correlation Between California Water and Global Water

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

By analyzing existing cross correlation between California Water Service and Global Water Resources, you can compare the effects of market volatilities on California Water and Global Water 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 California Water with a short position of Global Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of California Water and Global Water.

Diversification Opportunities for California Water and Global Water

-0.02

Correlation Coefficient

California Water  Global Water

Good diversification

The 3 months correlation between California and Global is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding California Water Service and Global Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Water Resources and California Water 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 California Water Service are associated (or correlated) with Global Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Water Resources has no effect on the direction of California Water i.e., California Water and Global Water go up and down completely randomly.

Pair Corralation between California Water and Global Water

Considering the 90-day investment horizon California Water Service is expected to under-perform the Global Water. But the stock apears to be less risky and, when comparing its historical volatility, California Water Service is 1.37 times less risky than Global Water. The stock trades about -0.08 of its potential returns per unit of risk. The Global Water Resources is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  1,195  in Global Water Resources on August 31, 2024 and sell it today you would earn a total of  147.00  from holding Global Water Resources or generate 12.3% return on investment over 90 days.

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

California Water Service  vs.  Global Water Resources

California Water Service

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days California Water Service has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, California Water is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Global Water Resources

Risk-Adjusted Performance

8 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Global Water Resources are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Global Water may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with California Water and Global Water

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

The idea behind California Water Service and Global Water Resources 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.