Correlation Between Weichai Power and Emerson Electric

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

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

Diversification Opportunities for Weichai Power and Emerson Electric

-0.74

Correlation Coefficient

Weichai Power  Emerson Electric

Pay attention - limited upside

The 3 months correlation between Weichai and Emerson is -0.74. Overlapping area represents the amount of risk that can be diversified away by holding Weichai Power Co and Emerson Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric and Weichai Power 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 Weichai Power Co are associated (or correlated) with Emerson Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerson Electric has no effect on the direction of Weichai Power i.e., Weichai Power and Emerson Electric go up and down completely randomly.

Pair Corralation between Weichai Power and Emerson Electric

Assuming the 90 days horizon Weichai Power Co is expected to generate 0.69 times more return on investment than Emerson Electric. However, Weichai Power Co is 1.44 times less risky than Emerson Electric. It trades about 0.38 of its potential returns per unit of risk. Emerson Electric is currently generating about 0.24 per unit of risk. If you would invest  156.00  in Weichai Power Co on September 13, 2024 and sell it today you would earn a total of  5.00  from holding Weichai Power Co or generate 3.21% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	11.11%
Values	Daily Returns

Weichai Power Co  vs.  Emerson Electric

Weichai Power

Risk-Adjusted Performance

0 of 100

Strong

Over the last 90 days Weichai Power Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile fundamental indicators, Weichai Power reported solid returns over the last few months and may actually be approaching a breakup point.

Emerson Electric

Risk-Adjusted Performance

18 of 100

Solid

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

Pair Trading with Weichai Power and Emerson Electric

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

The idea behind Weichai Power Co and Emerson Electric 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.