Correlation Between Deere and Komatsu

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

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

Diversification Opportunities for Deere and Komatsu

0.63

Correlation Coefficient

Deere  Komatsu

Poor diversification

The 3 months correlation between Deere and Komatsu is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Deere Company and Komatsu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Komatsu and Deere 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 Deere Company are associated (or correlated) with Komatsu. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Komatsu has no effect on the direction of Deere i.e., Deere and Komatsu go up and down completely randomly.

Pair Corralation between Deere and Komatsu

Assuming the 90 days horizon Deere is expected to generate 2.4 times less return on investment than Komatsu. But when comparing it to its historical volatility, Deere Company is 1.12 times less risky than Komatsu. It trades about 0.02 of its potential returns per unit of risk. Komatsu is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,036  in Komatsu on September 12, 2024 and sell it today you would earn a total of  525.00  from holding Komatsu or generate 25.79% return on investment over 90 days.

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

Deere Company  vs.  Komatsu

Deere Company

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Deere Company are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Deere reported solid returns over the last few months and may actually be approaching a breakup point.

Komatsu

Risk-Adjusted Performance

6 of 100

Modest

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

Pair Trading with Deere and Komatsu

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

The idea behind Deere Company and Komatsu 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.

Check out your portfolio center.

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 Bonds Directory module to find actively traded corporate debentures issued by US companies.