Correlation Between Duke Energy and MGE Energy

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

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

Diversification Opportunities for Duke Energy and MGE Energy

0.7

Correlation Coefficient

Duke Energy  MGE Energy

Poor diversification

The 3 months correlation between Duke and MGE is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Duke Energy and MGE Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MGE Energy and Duke Energy 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 Duke Energy are associated (or correlated) with MGE Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MGE Energy has no effect on the direction of Duke Energy i.e., Duke Energy and MGE Energy go up and down completely randomly.

Pair Corralation between Duke Energy and MGE Energy

Considering the 90-day investment horizon Duke Energy is expected to generate 4.46 times less return on investment than MGE Energy. But when comparing it to its historical volatility, Duke Energy is 2.62 times less risky than MGE Energy. It trades about 0.08 of its potential returns per unit of risk. MGE Energy is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  6,430  in MGE Energy on February 2, 2024 and sell it today you would earn a total of  1,466  from holding MGE Energy or generate 22.8% return on investment over 90 days.

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

Duke Energy  vs.  MGE Energy

Duke Energy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Duke Energy are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, Duke Energy is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

MGE Energy

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MGE Energy are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak technical and fundamental indicators, MGE Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Duke Energy and MGE Energy

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

The idea behind Duke Energy and MGE 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.