Correlation Between Consolidated Edison and American Electric

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

By analyzing existing cross correlation between Consolidated Edison and American Electric Power, you can compare the effects of market volatilities on Consolidated Edison and American 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 Consolidated Edison with a short position of American Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Consolidated Edison and American Electric.

Diversification Opportunities for Consolidated Edison and American Electric

0.54

Correlation Coefficient

Consolidated Edison  American Electric

Very weak diversification

The 3 months correlation between Consolidated and American is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Consolidated Edison and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power and Consolidated Edison 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 Consolidated Edison are associated (or correlated) with American Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of Consolidated Edison i.e., Consolidated Edison and American Electric go up and down completely randomly.

Pair Corralation between Consolidated Edison and American Electric

Allowing for the 90-day total investment horizon Consolidated Edison is expected to generate 0.89 times more return on investment than American Electric. However, Consolidated Edison is 1.13 times less risky than American Electric. It trades about 0.19 of its potential returns per unit of risk. American Electric Power is currently generating about 0.12 per unit of risk. If you would invest  9,060  in Consolidated Edison on February 2, 2024 and sell it today you would earn a total of  465.00  from holding Consolidated Edison or generate 5.13% return on investment over 90 days.

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

Consolidated Edison  vs.  American Electric Power

Consolidated Edison

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Consolidated Edison are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Consolidated Edison is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

American Electric Power

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady technical and fundamental indicators, American Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Consolidated Edison and American Electric

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

The idea behind Consolidated Edison and American Electric Power 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.