Correlation Between American States and American Water

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

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

Diversification Opportunities for American States and American Water

0.64

Correlation Coefficient

American States  American Water

Poor diversification

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

Pair Corralation between American States and American Water

Considering the 90-day investment horizon American States Water is expected to generate 1.04 times more return on investment than American Water. However, American States is 1.04 times more volatile than American Water Works. It trades about 0.0 of its potential returns per unit of risk. American Water Works is currently generating about -0.01 per unit of risk. If you would invest  7,509  in American States Water on February 3, 2024 and sell it today you would lose (230.00) from holding American States Water or give up 3.06% of portfolio value over 90 days.

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

American States Water  vs.  American Water Works

American States Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American States Water has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, American States is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

American Water Works

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Water Works are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, American Water is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with American States and American Water

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

The idea behind American States Water and American Water Works 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 CEOs Directory module to screen CEOs from public companies around the world.