Correlation Between Global Water and Essential Utilities

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

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

Diversification Opportunities for Global Water and Essential Utilities

0.48

Correlation Coefficient

Global Water  Essential Utilities

Very weak diversification

The 3 months correlation between Global and Essential is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Global Water Resources and Essential Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essential Utilities and Global 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 Global Water Resources are associated (or correlated) with Essential Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essential Utilities has no effect on the direction of Global Water i.e., Global Water and Essential Utilities go up and down completely randomly.

Pair Corralation between Global Water and Essential Utilities

Given the investment horizon of 90 days Global Water Resources is expected to generate 1.52 times more return on investment than Essential Utilities. However, Global Water is 1.52 times more volatile than Essential Utilities. It trades about 0.11 of its potential returns per unit of risk. Essential Utilities is currently generating about 0.06 per unit of risk. 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 Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Global Water Resources  vs.  Essential Utilities

Global Water Resources

Risk-Adjusted Performance

8 of 100

OK

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.

Essential Utilities

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Essential Utilities are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Essential Utilities is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Global Water and Essential Utilities

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

The idea behind Global Water Resources and Essential Utilities 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.