Correlation Between Cummins and Pentair PLC

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

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

Diversification Opportunities for Cummins and Pentair PLC

0.62

Correlation Coefficient

Cummins  Pentair PLC

Poor diversification

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

Pair Corralation between Cummins and Pentair PLC

Considering the 90-day investment horizon Cummins is expected to generate 1.24 times more return on investment than Pentair PLC. However, Cummins is 1.24 times more volatile than Pentair PLC. It trades about -0.06 of its potential returns per unit of risk. Pentair PLC is currently generating about -0.12 per unit of risk. If you would invest  34,676  in Cummins on December 29, 2024 and sell it today you would lose (2,332) from holding Cummins or give up 6.73% of portfolio value over 90 days.

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

Cummins  vs.  Pentair PLC

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.

Pentair PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pentair PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest abnormal performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Pair Trading with Cummins and Pentair PLC

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

The idea behind Cummins and Pentair 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.