Correlation Between Emerson Electric and Xylem

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

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

Diversification Opportunities for Emerson Electric and Xylem

-0.65

Correlation Coefficient

Emerson Electric  Xylem

Excellent diversification

The 3 months correlation between Emerson and Xylem is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Emerson Electric and Xylem Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xylem Inc 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 Xylem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xylem Inc has no effect on the direction of Emerson Electric i.e., Emerson Electric and Xylem go up and down completely randomly.

Pair Corralation between Emerson Electric and Xylem

Considering the 90-day investment horizon Emerson Electric is expected to generate 1.17 times more return on investment than Xylem. However, Emerson Electric is 1.17 times more volatile than Xylem Inc. It trades about 0.13 of its potential returns per unit of risk. Xylem Inc is currently generating about -0.11 per unit of risk. If you would invest  10,393  in Emerson Electric on September 21, 2024 and sell it today you would earn a total of  2,016  from holding Emerson Electric or generate 19.4% return on investment over 90 days.

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

Emerson Electric  vs.  Xylem Inc

Emerson Electric

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 12 (%) 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.

Xylem Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Xylem Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with Emerson Electric and Xylem

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

The idea behind Emerson Electric and Xylem Inc 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.