Correlation Between Cummins and Mitsubishi Heavy

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

By analyzing existing cross correlation between Cummins and Mitsubishi Heavy Industries, you can compare the effects of market volatilities on Cummins and Mitsubishi Heavy 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 Mitsubishi Heavy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cummins and Mitsubishi Heavy.

Diversification Opportunities for Cummins and Mitsubishi Heavy

0.7

Correlation Coefficient

Cummins  Mitsubishi Heavy

Poor diversification

The 3 months correlation between Cummins and Mitsubishi is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Mitsubishi Heavy Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mitsubishi Heavy Ind 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 Mitsubishi Heavy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mitsubishi Heavy Ind has no effect on the direction of Cummins i.e., Cummins and Mitsubishi Heavy go up and down completely randomly.

Pair Corralation between Cummins and Mitsubishi Heavy

Considering the 90-day investment horizon Cummins is expected to generate 786.81 times less return on investment than Mitsubishi Heavy. But when comparing it to its historical volatility, Cummins is 192.21 times less risky than Mitsubishi Heavy. It trades about 0.07 of its potential returns per unit of risk. Mitsubishi Heavy Industries is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  3,940  in Mitsubishi Heavy Industries on September 14, 2024 and sell it today you would lose (2,370) from holding Mitsubishi Heavy Industries or give up 60.15% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	87.85%
Values	Daily Returns

Cummins  vs.  Mitsubishi Heavy Industries

Cummins

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite fairly abnormal primary indicators, Cummins demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Mitsubishi Heavy Ind

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Mitsubishi Heavy Industries are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Mitsubishi Heavy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cummins and Mitsubishi Heavy

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

The idea behind Cummins and Mitsubishi Heavy 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.