Correlation Between Shanghai Electric and Cummins

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

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

Diversification Opportunities for Shanghai Electric and Cummins

0.85

Correlation Coefficient

Shanghai Electric  Cummins

Very poor diversification

The 3 months correlation between Shanghai and Cummins is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Electric Group and Cummins in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cummins and Shanghai 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 Shanghai Electric Group are associated (or correlated) with Cummins. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cummins has no effect on the direction of Shanghai Electric i.e., Shanghai Electric and Cummins go up and down completely randomly.

Pair Corralation between Shanghai Electric and Cummins

Assuming the 90 days horizon Shanghai Electric Group is expected to generate 6.56 times more return on investment than Cummins. However, Shanghai Electric is 6.56 times more volatile than Cummins. It trades about 0.13 of its potential returns per unit of risk. Cummins is currently generating about 0.35 per unit of risk. If you would invest  565.00  in Shanghai Electric Group on September 4, 2024 and sell it today you would earn a total of  145.00  from holding Shanghai Electric Group or generate 25.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Shanghai Electric Group  vs.  Cummins

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.

Cummins

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 18 (%) 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.

Pair Trading with Shanghai Electric and Cummins

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

The idea behind Shanghai Electric Group and Cummins 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.