Correlation Between Allison Transmission and Sumitomo Electric

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

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

Diversification Opportunities for Allison Transmission and Sumitomo Electric

0.23

Correlation Coefficient

Allison Transmission  Sumitomo Electric

Modest diversification

The 3 months correlation between Allison and Sumitomo is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Allison Transmission Holdings and Sumitomo Electric Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Electric and Allison Transmission 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 Allison Transmission Holdings are associated (or correlated) with Sumitomo Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Electric has no effect on the direction of Allison Transmission i.e., Allison Transmission and Sumitomo Electric go up and down completely randomly.

Pair Corralation between Allison Transmission and Sumitomo Electric

Given the investment horizon of 90 days Allison Transmission Holdings is expected to under-perform the Sumitomo Electric. But the stock apears to be less risky and, when comparing its historical volatility, Allison Transmission Holdings is 1.29 times less risky than Sumitomo Electric. The stock trades about -0.07 of its potential returns per unit of risk. The Sumitomo Electric Industries is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,815  in Sumitomo Electric Industries on December 30, 2024 and sell it today you would lose (94.00) from holding Sumitomo Electric Industries or give up 5.18% of portfolio value over 90 days.

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

Allison Transmission Holdings  vs.  Sumitomo Electric Industries

Allison Transmission

Risk-Adjusted Performance

Very Weak

Over the last 90 days Allison Transmission Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Sumitomo Electric

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sumitomo Electric Industries has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Sumitomo Electric is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Allison Transmission and Sumitomo Electric

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

The idea behind Allison Transmission Holdings and Sumitomo Electric 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.