Correlation Between Consolidated Edison and FirstEnergy

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

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

Diversification Opportunities for Consolidated Edison and FirstEnergy

0.83

Correlation Coefficient

Consolidated Edison  FirstEnergy

Very poor diversification

The 3 months correlation between Consolidated and FirstEnergy is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Consolidated Edison and FirstEnergy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FirstEnergy and Consolidated Edison 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 Consolidated Edison are associated (or correlated) with FirstEnergy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FirstEnergy has no effect on the direction of Consolidated Edison i.e., Consolidated Edison and FirstEnergy go up and down completely randomly.

Pair Corralation between Consolidated Edison and FirstEnergy

Allowing for the 90-day total investment horizon Consolidated Edison is expected to generate 1.19 times more return on investment than FirstEnergy. However, Consolidated Edison is 1.19 times more volatile than FirstEnergy. It trades about -0.05 of its potential returns per unit of risk. FirstEnergy is currently generating about -0.09 per unit of risk. If you would invest  10,240  in Consolidated Edison on September 3, 2024 and sell it today you would lose (390.00) from holding Consolidated Edison or give up 3.81% of portfolio value over 90 days.

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

Consolidated Edison  vs.  FirstEnergy

Consolidated Edison

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Consolidated Edison has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Consolidated Edison is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

FirstEnergy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days FirstEnergy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, FirstEnergy is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Consolidated Edison and FirstEnergy

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

The idea behind Consolidated Edison and FirstEnergy 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.