Correlation Between Cummins and General Electric

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

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

Diversification Opportunities for Cummins and General Electric

-0.13

Correlation Coefficient

Cummins  General Electric

Good diversification

The 3 months correlation between Cummins and General is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and General Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Electric 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 General Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Electric has no effect on the direction of Cummins i.e., Cummins and General Electric go up and down completely randomly.

Pair Corralation between Cummins and General Electric

Assuming the 90 days trading horizon Cummins is expected to generate 1.56 times less return on investment than General Electric. But when comparing it to its historical volatility, Cummins is 1.42 times less risky than General Electric. It trades about 0.08 of its potential returns per unit of risk. General Electric is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  40,992  in General Electric on October 13, 2024 and sell it today you would earn a total of  63,872  from holding General Electric or generate 155.82% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.19%
Values	Daily Returns

Cummins  vs.  General Electric

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.

General Electric

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Cummins and General Electric

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

The idea behind Cummins and General 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.