Correlation Between Essential Utilities and Southern

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

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

Diversification Opportunities for Essential Utilities and Southern

-0.75

Correlation Coefficient

Essential Utilities  Southern

Pay attention - limited upside

The 3 months correlation between Essential and Southern is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding Essential Utilities and Southern Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern and Essential Utilities 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 Essential Utilities are associated (or correlated) with Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern has no effect on the direction of Essential Utilities i.e., Essential Utilities and Southern go up and down completely randomly.

Pair Corralation between Essential Utilities and Southern

Given the investment horizon of 90 days Essential Utilities is expected to generate 1.47 times more return on investment than Southern. However, Essential Utilities is 1.47 times more volatile than Southern Co. It trades about 0.11 of its potential returns per unit of risk. Southern Co is currently generating about -0.16 per unit of risk. If you would invest  3,947  in Essential Utilities on July 18, 2024 and sell it today you would earn a total of  90.00  from holding Essential Utilities or generate 2.28% return on investment over 90 days.

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

Essential Utilities  vs.  Southern Co

Essential Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Southern

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Co are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound forward-looking indicators, Southern is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Essential Utilities and Southern

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

The idea behind Essential Utilities and Southern Co 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.