Correlation Between Southern and Connecticut Light

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

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

Diversification Opportunities for Southern and Connecticut Light

0.39

Correlation Coefficient

Southern  Connecticut Light

Weak diversification

The 3 months correlation between Southern and Connecticut is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and The Connecticut Light in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Connecticut Light and Southern 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 Southern Company are associated (or correlated) with Connecticut Light. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Connecticut Light has no effect on the direction of Southern i.e., Southern and Connecticut Light go up and down completely randomly.

Pair Corralation between Southern and Connecticut Light

Allowing for the 90-day total investment horizon Southern Company is expected to under-perform the Connecticut Light. But the stock apears to be less risky and, when comparing its historical volatility, Southern Company is 9.18 times less risky than Connecticut Light. The stock trades about -0.06 of its potential returns per unit of risk. The The Connecticut Light is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  5,540  in The Connecticut Light on September 12, 2024 and sell it today you would lose (170.00) from holding The Connecticut Light or give up 3.07% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.31%
Values	Daily Returns

Southern Company  vs.  The Connecticut Light

Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Southern is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Connecticut Light

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Connecticut Light are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating technical indicators, Connecticut Light reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southern and Connecticut Light

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

The idea behind Southern Company and The Connecticut Light 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.