Correlation Between National Grid and Red Electrica

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

By analyzing existing cross correlation between National Grid PLC and Red Electrica Corporacion, you can compare the effects of market volatilities on National Grid and Red Electrica 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 National Grid with a short position of Red Electrica. Check out your portfolio center. Please also check ongoing floating volatility patterns of National Grid and Red Electrica.

Diversification Opportunities for National Grid and Red Electrica

0.91

Correlation Coefficient

National Grid  Red Electrica

Almost no diversification

The 3 months correlation between National and Red is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding National Grid PLC and Red Electrica Corporacion in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Red Electrica Corporacion and National Grid 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 National Grid PLC are associated (or correlated) with Red Electrica. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Red Electrica Corporacion has no effect on the direction of National Grid i.e., National Grid and Red Electrica go up and down completely randomly.

Pair Corralation between National Grid and Red Electrica

Considering the 90-day investment horizon National Grid PLC is expected to generate 0.82 times more return on investment than Red Electrica. However, National Grid PLC is 1.23 times less risky than Red Electrica. It trades about -0.09 of its potential returns per unit of risk. Red Electrica Corporacion is currently generating about -0.09 per unit of risk. If you would invest  6,689  in National Grid PLC on September 5, 2024 and sell it today you would lose (392.00) from holding National Grid PLC or give up 5.86% of portfolio value over 90 days.

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

National Grid PLC  vs.  Red Electrica Corporacion

National Grid PLC

Risk-Adjusted Performance

0 of 100

Very Weak

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

Red Electrica Corporacion

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Red Electrica Corporacion has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with National Grid and Red Electrica

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

The idea behind National Grid PLC and Red Electrica Corporacion 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.