Correlation Between Eaton Plc and Cummins

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

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

Diversification Opportunities for Eaton Plc and Cummins

0.41

Correlation Coefficient

Eaton Plc  Cummins

Very weak diversification

The 3 months correlation between Eaton and Cummins is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Eaton plc and Cummins in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cummins and Eaton Plc 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 Eaton plc are associated (or correlated) with Cummins. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cummins has no effect on the direction of Eaton Plc i.e., Eaton Plc and Cummins go up and down completely randomly.

Pair Corralation between Eaton Plc and Cummins

Assuming the 90 days trading horizon Eaton Plc is expected to generate 48.55 times less return on investment than Cummins. But when comparing it to its historical volatility, Eaton plc is 2.74 times less risky than Cummins. It trades about 0.01 of its potential returns per unit of risk. Cummins is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  46,679  in Cummins on October 9, 2024 and sell it today you would earn a total of  8,026  from holding Cummins or generate 17.19% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	97.3%
Values	Daily Returns

Eaton plc  vs.  Cummins

Eaton plc

Risk-Adjusted Performance

10 of 100

OK

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

Cummins

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain primary indicators, Cummins sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Eaton Plc and Cummins

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

The idea behind Eaton plc and Cummins 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.