Correlation Between Cummins and Eaton Plc

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

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

Diversification Opportunities for Cummins and Eaton Plc

0.62

Correlation Coefficient

Cummins  Eaton Plc

Poor diversification

The 3 months correlation between Cummins and Eaton is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Eaton plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton plc and Cummins 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 Cummins are associated (or correlated) with Eaton Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eaton plc has no effect on the direction of Cummins i.e., Cummins and Eaton Plc go up and down completely randomly.

Pair Corralation between Cummins and Eaton Plc

Assuming the 90 days trading horizon Cummins is expected to generate 1.47 times less return on investment than Eaton Plc. In addition to that, Cummins is 1.09 times more volatile than Eaton plc. It trades about 0.08 of its total potential returns per unit of risk. Eaton plc is currently generating about 0.12 per unit of volatility. If you would invest  5,559  in Eaton plc on October 13, 2024 and sell it today you would earn a total of  9,216  from holding Eaton plc or generate 165.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.39%
Values	Daily Returns

Cummins  vs.  Eaton plc

Cummins

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Cummins sustained solid returns over the last few months and may actually be approaching a breakup point.

Eaton plc

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton plc are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Eaton Plc may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Cummins and Eaton Plc

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

The idea behind Cummins and Eaton plc 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.