Correlation Between Southern and FirstEnergy

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Can any of the company-specific risk be diversified away by investing in both Southern and FirstEnergy 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 FirstEnergy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Southern Company and FirstEnergy, you can compare the effects of market volatilities on Southern and FirstEnergy 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 FirstEnergy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southern and FirstEnergy.

Diversification Opportunities for Southern and FirstEnergy

0.64
  Correlation Coefficient

Poor diversification

The 3 months correlation between Southern and FirstEnergy is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and FirstEnergy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FirstEnergy 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 FirstEnergy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FirstEnergy has no effect on the direction of Southern i.e., Southern and FirstEnergy go up and down completely randomly.

Pair Corralation between Southern and FirstEnergy

Allowing for the 90-day total investment horizon Southern Company is expected to generate 0.94 times more return on investment than FirstEnergy. However, Southern Company is 1.06 times less risky than FirstEnergy. It trades about 0.01 of its potential returns per unit of risk. FirstEnergy is currently generating about -0.01 per unit of risk. If you would invest  7,067  in Southern Company on December 29, 2023 and sell it today you would earn a total of  107.00  from holding Southern Company or generate 1.51% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Southern Company  vs.  FirstEnergy

 Performance 
       Timeline  
Southern 

Risk-Adjusted Performance

4 of 100

 
Low
 
High
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Southern Company are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Southern is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.
FirstEnergy 

Risk-Adjusted Performance

7 of 100

 
Low
 
High
OK
Compared to the overall equity markets, risk-adjusted returns on investments in FirstEnergy are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile technical and fundamental indicators, FirstEnergy may actually be approaching a critical reversion point that can send shares even higher in April 2024.

Southern and FirstEnergy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Southern and FirstEnergy

The main advantage of trading using opposite Southern and FirstEnergy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southern position performs unexpectedly, FirstEnergy 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 FirstEnergy will offset losses from the drop in FirstEnergy's long position.
The idea behind Southern Company and FirstEnergy 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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