Correlation Between American Electric and Duke Energy

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

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

Diversification Opportunities for American Electric and Duke Energy

0.32

Correlation Coefficient

American Electric  Duke Energy

Weak diversification

The 3 months correlation between American and Duke is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding American Electric Power and Duke Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Duke Energy and American Electric 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 American Electric Power are associated (or correlated) with Duke Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Duke Energy has no effect on the direction of American Electric i.e., American Electric and Duke Energy go up and down completely randomly.

Pair Corralation between American Electric and Duke Energy

Considering the 90-day investment horizon American Electric Power is expected to generate 2.75 times more return on investment than Duke Energy. However, American Electric is 2.75 times more volatile than Duke Energy. It trades about 0.18 of its potential returns per unit of risk. Duke Energy is currently generating about -0.05 per unit of risk. If you would invest  8,395  in American Electric Power on February 5, 2024 and sell it today you would earn a total of  430.00  from holding American Electric Power or generate 5.12% return on investment over 90 days.

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

American Electric Power  vs.  Duke Energy

American Electric Power

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical and fundamental indicators, American Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Duke Energy

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Duke Energy are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong forward-looking signals, Duke Energy is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Electric and Duke Energy

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

The idea behind American Electric Power and Duke Energy 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.