Correlation Between POTOMAC and Allient

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

By analyzing existing cross correlation between POTOMAC ELEC PWR and Allient, you can compare the effects of market volatilities on POTOMAC and Allient 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 POTOMAC with a short position of Allient. Check out your portfolio center. Please also check ongoing floating volatility patterns of POTOMAC and Allient.

Diversification Opportunities for POTOMAC and Allient

-0.69

Correlation Coefficient

POTOMAC  Allient

Excellent diversification

The 3 months correlation between POTOMAC and Allient is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding POTOMAC ELEC PWR and Allient in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allient and POTOMAC 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 POTOMAC ELEC PWR are associated (or correlated) with Allient. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allient has no effect on the direction of POTOMAC i.e., POTOMAC and Allient go up and down completely randomly.

Pair Corralation between POTOMAC and Allient

Assuming the 90 days trading horizon POTOMAC is expected to generate 19.82 times less return on investment than Allient. But when comparing it to its historical volatility, POTOMAC ELEC PWR is 2.33 times less risky than Allient. It trades about 0.08 of its potential returns per unit of risk. Allient is currently generating about 0.71 of returns per unit of risk over similar time horizon. If you would invest  1,770  in Allient on September 2, 2024 and sell it today you would earn a total of  827.00  from holding Allient or generate 46.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	61.9%
Values	Daily Returns

POTOMAC ELEC PWR  vs.  Allient

POTOMAC ELEC PWR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days POTOMAC ELEC PWR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, POTOMAC is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Allient

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Allient are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Allient unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with POTOMAC and Allient

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

The idea behind POTOMAC ELEC PWR and Allient 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.