Correlation Between National Grid and AES

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

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

Diversification Opportunities for National Grid and AES

-0.42

Correlation Coefficient

National Grid  AES

Very good diversification

The 3 months correlation between National and AES is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding National Grid plc and The AES in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AES and National Grid 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 National Grid plc are associated (or correlated) with AES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AES has no effect on the direction of National Grid i.e., National Grid and AES go up and down completely randomly.

Pair Corralation between National Grid and AES

Assuming the 90 days trading horizon National Grid plc is expected to under-perform the AES. But the stock apears to be less risky and, when comparing its historical volatility, National Grid plc is 1.84 times less risky than AES. The stock trades about 0.0 of its potential returns per unit of risk. The The AES is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  891.00  in The AES on May 4, 2025 and sell it today you would earn a total of  291.00  from holding The AES or generate 32.66% return on investment over 90 days.

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

National Grid plc  vs.  The AES

National Grid plc

Risk-Adjusted Performance

Very Weak

Over the last 90 days National Grid plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, National Grid is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

AES

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The AES are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, AES reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with National Grid and AES

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

The idea behind National Grid plc and The AES 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.