Correlation Between Smith AO and Cummins

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

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

Diversification Opportunities for Smith AO and Cummins

0.32

Correlation Coefficient

Smith AO  Cummins

Weak diversification

The 3 months correlation between Smith and Cummins is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Smith AO and Cummins in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cummins and Smith AO 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 Smith AO 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 Smith AO i.e., Smith AO and Cummins go up and down completely randomly.

Pair Corralation between Smith AO and Cummins

Considering the 90-day investment horizon Smith AO is expected to under-perform the Cummins. But the stock apears to be less risky and, when comparing its historical volatility, Smith AO is 1.21 times less risky than Cummins. The stock trades about -0.13 of its potential returns per unit of risk. The Cummins is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  37,326  in Cummins on November 28, 2024 and sell it today you would lose (1,221) from holding Cummins or give up 3.27% of portfolio value over 90 days.

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

Smith AO  vs.  Cummins

Smith AO

Risk-Adjusted Performance

Very Weak

Over the last 90 days Smith AO has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Cummins

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cummins has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong primary indicators, Cummins is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Smith AO and Cummins

The main advantage of trading using opposite Smith AO and Cummins positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smith AO 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 Smith AO 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.

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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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.