Correlation Between EuroSite Power and American Electric

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

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

Diversification Opportunities for EuroSite Power and American Electric

0.3

Correlation Coefficient

EuroSite Power  American Electric

Weak diversification

The 3 months correlation between EuroSite and American is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding EuroSite Power and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power and EuroSite Power 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 EuroSite Power are associated (or correlated) with American Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of EuroSite Power i.e., EuroSite Power and American Electric go up and down completely randomly.

Pair Corralation between EuroSite Power and American Electric

Given the investment horizon of 90 days EuroSite Power is expected to generate 9.54 times more return on investment than American Electric. However, EuroSite Power is 9.54 times more volatile than American Electric Power. It trades about 0.11 of its potential returns per unit of risk. American Electric Power is currently generating about 0.0 per unit of risk. If you would invest  4.00  in EuroSite Power on September 3, 2024 and sell it today you would earn a total of  2.00  from holding EuroSite Power or generate 50.0% return on investment over 90 days.

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

EuroSite Power  vs.  American Electric Power

EuroSite Power

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in EuroSite Power are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, EuroSite Power reported solid returns over the last few months and may actually be approaching a breakup point.

American Electric Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, American Electric is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with EuroSite Power and American Electric

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

The idea behind EuroSite Power and American Electric Power 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..