Correlation Between Southern Company and Entergy Arkansas

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

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

Diversification Opportunities for Southern Company and Entergy Arkansas

0.93

Correlation Coefficient

Southern Company  Entergy Arkansas

Almost no diversification

The 3 months correlation between Southern and Entergy is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company Series and Entergy Arkansas LLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Entergy Arkansas LLC and Southern Company 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 Series are associated (or correlated) with Entergy Arkansas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Entergy Arkansas LLC has no effect on the direction of Southern Company i.e., Southern Company and Entergy Arkansas go up and down completely randomly.

Pair Corralation between Southern Company and Entergy Arkansas

Given the investment horizon of 90 days Southern Company Series is expected to under-perform the Entergy Arkansas. But the stock apears to be less risky and, when comparing its historical volatility, Southern Company Series is 1.02 times less risky than Entergy Arkansas. The stock trades about -0.35 of its potential returns per unit of risk. The Entergy Arkansas LLC is currently generating about -0.2 of returns per unit of risk over similar time horizon. If you would invest  2,174  in Entergy Arkansas LLC on September 27, 2024 and sell it today you would lose (58.00) from holding Entergy Arkansas LLC or give up 2.67% of portfolio value over 90 days.

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

Southern Company Series  vs.  Entergy Arkansas LLC

Southern Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Company Series has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's forward-looking indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Entergy Arkansas LLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Entergy Arkansas LLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Pair Trading with Southern Company and Entergy Arkansas

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

The idea behind Southern Company Series and Entergy Arkansas LLC 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.