Correlation Between Cummins and Enpro Industries

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

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

Diversification Opportunities for Cummins and Enpro Industries

0.75

Correlation Coefficient

Cummins  Enpro Industries

Poor diversification

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

Pair Corralation between Cummins and Enpro Industries

Considering the 90-day investment horizon Cummins is expected to generate 1.08 times less return on investment than Enpro Industries. But when comparing it to its historical volatility, Cummins is 1.36 times less risky than Enpro Industries. It trades about 0.22 of its potential returns per unit of risk. Enpro Industries is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  15,095  in Enpro Industries on September 2, 2024 and sell it today you would earn a total of  3,815  from holding Enpro Industries or generate 25.27% return on investment over 90 days.

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

Cummins  vs.  Enpro Industries

Cummins

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite fairly abnormal primary indicators, Cummins demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Enpro Industries

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Enpro Industries are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Enpro Industries displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cummins and Enpro Industries

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

The idea behind Cummins and Enpro 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.

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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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .