Correlation Between Emerson Electric and Cincinnati Financial

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

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

Diversification Opportunities for Emerson Electric and Cincinnati Financial

0.93

Correlation Coefficient

Emerson Electric  Cincinnati Financial

Almost no diversification

The 3 months correlation between Emerson and Cincinnati is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Emerson Electric and Cincinnati Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cincinnati Financial and Emerson Electric 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 Emerson Electric 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 Emerson Electric i.e., Emerson Electric and Cincinnati Financial go up and down completely randomly.

Pair Corralation between Emerson Electric and Cincinnati Financial

Considering the 90-day investment horizon Emerson Electric is expected to generate 1.19 times less return on investment than Cincinnati Financial. In addition to that, Emerson Electric is 1.02 times more volatile than Cincinnati Financial. It trades about 0.05 of its total potential returns per unit of risk. Cincinnati Financial is currently generating about 0.06 per unit of volatility. If you would invest  9,851  in Cincinnati Financial on September 24, 2024 and sell it today you would earn a total of  4,408  from holding Cincinnati Financial or generate 44.75% return on investment over 90 days.

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

Emerson Electric  vs.  Cincinnati Financial

Emerson Electric

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal primary indicators, Emerson Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Cincinnati Financial

Risk-Adjusted Performance

4 of 100

Insignificant

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 Emerson Electric and Cincinnati Financial

The main advantage of trading using opposite Emerson Electric and Cincinnati Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerson Electric 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 Emerson Electric 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.