Correlation Between Southern and Union Electric

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

By analyzing existing cross correlation between Southern Company and Union Electric, you can compare the effects of market volatilities on Southern and Union Electric 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 Union Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southern and Union Electric.

Diversification Opportunities for Southern and Union Electric

-0.47

Correlation Coefficient

Southern  Union Electric

Very good diversification

The 3 months correlation between Southern and Union is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and Union Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Union Electric 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 Union Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Union Electric has no effect on the direction of Southern i.e., Southern and Union Electric go up and down completely randomly.

Pair Corralation between Southern and Union Electric

Allowing for the 90-day total investment horizon Southern is expected to generate 2.12 times less return on investment than Union Electric. But when comparing it to its historical volatility, Southern Company is 2.62 times less risky than Union Electric. It trades about 0.08 of its potential returns per unit of risk. Union Electric is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  8,347  in Union Electric on September 14, 2024 and sell it today you would earn a total of  2,653  from holding Union Electric or generate 31.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	71.38%
Values	Daily Returns

Southern Company  vs.  Union Electric

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 latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Union Electric

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Union Electric are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady fundamental indicators, Union Electric may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Southern and Union Electric

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

The idea behind Southern Company and Union Electric 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.