Correlation Between Playa Hotels and NRG Energy

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

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

Diversification Opportunities for Playa Hotels and NRG Energy

0.74

Correlation Coefficient

Playa Hotels  NRG Energy

Poor diversification

The 3 months correlation between Playa and NRG is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Playa Hotels Resorts and NRG Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NRG Energy and Playa Hotels 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 Playa Hotels Resorts are associated (or correlated) with NRG Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NRG Energy has no effect on the direction of Playa Hotels i.e., Playa Hotels and NRG Energy go up and down completely randomly.

Pair Corralation between Playa Hotels and NRG Energy

Given the investment horizon of 90 days Playa Hotels Resorts is expected to generate 0.72 times more return on investment than NRG Energy. However, Playa Hotels Resorts is 1.38 times less risky than NRG Energy. It trades about 0.26 of its potential returns per unit of risk. NRG Energy is currently generating about 0.12 per unit of risk. If you would invest  767.00  in Playa Hotels Resorts on September 14, 2024 and sell it today you would earn a total of  248.00  from holding Playa Hotels Resorts or generate 32.33% return on investment over 90 days.

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

Playa Hotels Resorts  vs.  NRG Energy

Playa Hotels Resorts

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Playa Hotels Resorts are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Playa Hotels sustained solid returns over the last few months and may actually be approaching a breakup point.

NRG Energy

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NRG Energy are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, NRG Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Playa Hotels and NRG Energy

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

The idea behind Playa Hotels Resorts and NRG 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.