Correlation Between Emerson Electric and Power Solutions

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

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

Diversification Opportunities for Emerson Electric and Power Solutions

0.43

Correlation Coefficient

Emerson Electric  Power Solutions

Very weak diversification

The 3 months correlation between Emerson and Power is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Emerson Electric and Power Solutions International, in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Solutions Inte and Emerson Electric 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 Emerson Electric are associated (or correlated) with Power Solutions. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Solutions Inte has no effect on the direction of Emerson Electric i.e., Emerson Electric and Power Solutions go up and down completely randomly.

Pair Corralation between Emerson Electric and Power Solutions

Considering the 90-day investment horizon Emerson Electric is expected to under-perform the Power Solutions. But the stock apears to be less risky and, when comparing its historical volatility, Emerson Electric is 8.5 times less risky than Power Solutions. The stock trades about -0.08 of its potential returns per unit of risk. The Power Solutions International, is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  3,275  in Power Solutions International, on October 23, 2024 and sell it today you would earn a total of  230.00  from holding Power Solutions International, or generate 7.02% return on investment over 90 days.

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

Emerson Electric  vs.  Power Solutions International,

Emerson Electric

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal primary indicators, Emerson Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Power Solutions Inte

Risk-Adjusted Performance

12 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Power Solutions International, are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain forward indicators, Power Solutions showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Emerson Electric and Power Solutions

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

The idea behind Emerson Electric and Power Solutions International, 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.