Correlation Between Essential Utilities and Global Water

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

By analyzing existing cross correlation between Essential Utilities and Global Water Resources, you can compare the effects of market volatilities on Essential Utilities and Global Water 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 Essential Utilities with a short position of Global Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Essential Utilities and Global Water.

Diversification Opportunities for Essential Utilities and Global Water

0.48

Correlation Coefficient

Essential Utilities  Global Water

Very weak diversification

The 3 months correlation between Essential and Global is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Essential Utilities and Global Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Water Resources and Essential Utilities 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 Essential Utilities are associated (or correlated) with Global Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Water Resources has no effect on the direction of Essential Utilities i.e., Essential Utilities and Global Water go up and down completely randomly.

Pair Corralation between Essential Utilities and Global Water

Given the investment horizon of 90 days Essential Utilities is expected to generate 3.0 times less return on investment than Global Water. But when comparing it to its historical volatility, Essential Utilities is 1.52 times less risky than Global Water. It trades about 0.06 of its potential returns per unit of risk. Global Water Resources is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  1,195  in Global Water Resources on August 31, 2024 and sell it today you would earn a total of  147.00  from holding Global Water Resources or generate 12.3% return on investment over 90 days.

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

Essential Utilities  vs.  Global Water Resources

Essential Utilities

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Essential Utilities are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Essential Utilities is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Global Water Resources

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Global Water Resources are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Global Water may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Essential Utilities and Global Water

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

The idea behind Essential Utilities and Global Water Resources 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.