Correlation Between Cummins and Shanghai Electric

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

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

Diversification Opportunities for Cummins and Shanghai Electric

0.83

Correlation Coefficient

Cummins  Shanghai Electric

Very poor diversification

The 3 months correlation between Cummins and Shanghai is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Shanghai Electric Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Electric 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 Shanghai Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Electric has no effect on the direction of Cummins i.e., Cummins and Shanghai Electric go up and down completely randomly.

Pair Corralation between Cummins and Shanghai Electric

Considering the 90-day investment horizon Cummins is expected to generate 1.55 times less return on investment than Shanghai Electric. But when comparing it to its historical volatility, Cummins is 2.86 times less risky than Shanghai Electric. It trades about 0.07 of its potential returns per unit of risk. Shanghai Electric Group is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  451.00  in Shanghai Electric Group on September 3, 2024 and sell it today you would earn a total of  259.00  from holding Shanghai Electric Group or generate 57.43% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.8%
Values	Daily Returns

Cummins  vs.  Shanghai Electric Group

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.

Shanghai Electric

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Electric Group are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile essential indicators, Shanghai Electric showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cummins and Shanghai Electric

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

The idea behind Cummins and Shanghai Electric Group 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.