Correlation Between Cummins and Kawasaki Heavy

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

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

Diversification Opportunities for Cummins and Kawasaki Heavy

0.5

Correlation Coefficient

Cummins  Kawasaki Heavy

Very weak diversification

The 3 months correlation between Cummins and Kawasaki is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Kawasaki Heavy Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kawasaki Heavy Industries and Cummins 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 Cummins are associated (or correlated) with Kawasaki Heavy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kawasaki Heavy Industries has no effect on the direction of Cummins i.e., Cummins and Kawasaki Heavy go up and down completely randomly.

Pair Corralation between Cummins and Kawasaki Heavy

Considering the 90-day investment horizon Cummins is expected to generate 1.02 times less return on investment than Kawasaki Heavy. But when comparing it to its historical volatility, Cummins is 2.19 times less risky than Kawasaki Heavy. It trades about 0.26 of its potential returns per unit of risk. Kawasaki Heavy Industries is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,281  in Kawasaki Heavy Industries on September 12, 2024 and sell it today you would earn a total of  319.00  from holding Kawasaki Heavy Industries or generate 24.9% return on investment over 90 days.

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

Cummins  vs.  Kawasaki Heavy Industries

Cummins

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak primary indicators, Cummins demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Kawasaki Heavy Industries

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Kawasaki Heavy Industries are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward indicators, Kawasaki Heavy showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cummins and Kawasaki Heavy

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

The idea behind Cummins and Kawasaki Heavy Industries 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.