Correlation Between Lincoln Electric and Westinghouse Air

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

By analyzing existing cross correlation between Lincoln Electric Holdings and Westinghouse Air Brake, you can compare the effects of market volatilities on Lincoln Electric and Westinghouse Air 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 Lincoln Electric with a short position of Westinghouse Air. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lincoln Electric and Westinghouse Air.

Diversification Opportunities for Lincoln Electric and Westinghouse Air

0.8

Correlation Coefficient

Lincoln Electric  Westinghouse Air

Very poor diversification

The 3 months correlation between Lincoln and Westinghouse is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Lincoln Electric Holdings and Westinghouse Air Brake in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westinghouse Air Brake and Lincoln 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 Lincoln Electric Holdings are associated (or correlated) with Westinghouse Air. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westinghouse Air Brake has no effect on the direction of Lincoln Electric i.e., Lincoln Electric and Westinghouse Air go up and down completely randomly.

Pair Corralation between Lincoln Electric and Westinghouse Air

Given the investment horizon of 90 days Lincoln Electric Holdings is expected to under-perform the Westinghouse Air. But the stock apears to be less risky and, when comparing its historical volatility, Lincoln Electric Holdings is 1.29 times less risky than Westinghouse Air. The stock trades about -0.53 of its potential returns per unit of risk. The Westinghouse Air Brake is currently generating about -0.25 of returns per unit of risk over similar time horizon. If you would invest  20,269  in Westinghouse Air Brake on October 9, 2024 and sell it today you would lose (1,355) from holding Westinghouse Air Brake or give up 6.69% of portfolio value over 90 days.

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

Lincoln Electric Holdings  vs.  Westinghouse Air Brake

Lincoln Electric Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lincoln Electric Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Lincoln Electric is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Westinghouse Air Brake

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Westinghouse Air Brake are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Westinghouse Air is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Lincoln Electric and Westinghouse Air

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

The idea behind Lincoln Electric Holdings and Westinghouse Air Brake 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.