Correlation Between California Water and Middlesex Water

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

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

Diversification Opportunities for California Water and Middlesex Water

0.3

Correlation Coefficient

California Water  Middlesex Water

Weak diversification

The 3 months correlation between California and Middlesex is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding California Water Service and Middlesex Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Middlesex Water and California Water 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 California Water Service are associated (or correlated) with Middlesex Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Middlesex Water has no effect on the direction of California Water i.e., California Water and Middlesex Water go up and down completely randomly.

Pair Corralation between California Water and Middlesex Water

Considering the 90-day investment horizon California Water Service is expected to generate 0.88 times more return on investment than Middlesex Water. However, California Water Service is 1.14 times less risky than Middlesex Water. It trades about 0.01 of its potential returns per unit of risk. Middlesex Water is currently generating about -0.05 per unit of risk. If you would invest  5,133  in California Water Service on February 3, 2024 and sell it today you would lose (88.00) from holding California Water Service or give up 1.71% of portfolio value over 90 days.

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

California Water Service  vs.  Middlesex Water

California Water Service

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in California Water Service are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, California Water may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Middlesex Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Middlesex Water has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Middlesex Water is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Water and Middlesex Water

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

The idea behind California Water Service and Middlesex Water 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.