Correlation Between Frontdoor and DTE Energy

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

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

Diversification Opportunities for Frontdoor and DTE Energy

-0.69

Correlation Coefficient

Frontdoor  DTE Energy

Excellent diversification

The 3 months correlation between Frontdoor and DTE is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding Frontdoor and DTE Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DTE Energy and Frontdoor 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 Frontdoor are associated (or correlated) with DTE Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DTE Energy has no effect on the direction of Frontdoor i.e., Frontdoor and DTE Energy go up and down completely randomly.

Pair Corralation between Frontdoor and DTE Energy

Given the investment horizon of 90 days Frontdoor is expected to generate 1.81 times more return on investment than DTE Energy. However, Frontdoor is 1.81 times more volatile than DTE Energy. It trades about 0.19 of its potential returns per unit of risk. DTE Energy is currently generating about -0.06 per unit of risk. If you would invest  4,769  in Frontdoor on September 3, 2024 and sell it today you would earn a total of  1,091  from holding Frontdoor or generate 22.88% return on investment over 90 days.

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

Frontdoor  vs.  DTE Energy

Frontdoor

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Frontdoor are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating fundamental indicators, Frontdoor reported solid returns over the last few months and may actually be approaching a breakup point.

DTE Energy

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Frontdoor and DTE Energy

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

The idea behind Frontdoor and DTE 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.

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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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.