Correlation Between Air Products and Cincinnati Financial

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

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

Diversification Opportunities for Air Products and Cincinnati Financial

0.57

Correlation Coefficient

Air Products  Cincinnati Financial

Very weak diversification

The 3 months correlation between Air and Cincinnati is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Air Products and and Cincinnati Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cincinnati Financial and Air Products 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 Air Products and are associated (or correlated) with Cincinnati Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cincinnati Financial has no effect on the direction of Air Products i.e., Air Products and Cincinnati Financial go up and down completely randomly.

Pair Corralation between Air Products and Cincinnati Financial

Considering the 90-day investment horizon Air Products is expected to generate 5.42 times less return on investment than Cincinnati Financial. But when comparing it to its historical volatility, Air Products and is 1.01 times less risky than Cincinnati Financial. It trades about 0.01 of its potential returns per unit of risk. Cincinnati Financial is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  13,542  in Cincinnati Financial on September 24, 2024 and sell it today you would earn a total of  757.00  from holding Cincinnati Financial or generate 5.59% return on investment over 90 days.

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

Air Products and  vs.  Cincinnati Financial

Air Products

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Air Products and has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Air Products is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Cincinnati Financial

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Cincinnati Financial are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Cincinnati Financial is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Air Products and Cincinnati Financial

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

The idea behind Air Products and and Cincinnati Financial 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.