Correlation Between ServiceNow and Emerson Electric

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

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

Diversification Opportunities for ServiceNow and Emerson Electric

0.89

Correlation Coefficient

ServiceNow  Emerson Electric

Very poor diversification

The 3 months correlation between ServiceNow and Emerson is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding ServiceNow and Emerson Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric and ServiceNow 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 ServiceNow are associated (or correlated) with Emerson Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerson Electric has no effect on the direction of ServiceNow i.e., ServiceNow and Emerson Electric go up and down completely randomly.

Pair Corralation between ServiceNow and Emerson Electric

Considering the 90-day investment horizon ServiceNow is expected to generate 1.01 times more return on investment than Emerson Electric. However, ServiceNow is 1.01 times more volatile than Emerson Electric. It trades about 0.15 of its potential returns per unit of risk. Emerson Electric is currently generating about 0.14 per unit of risk. If you would invest  92,360  in ServiceNow on September 24, 2024 and sell it today you would earn a total of  16,765  from holding ServiceNow or generate 18.15% return on investment over 90 days.

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

ServiceNow  vs.  Emerson Electric

ServiceNow

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ServiceNow are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, ServiceNow showed solid returns over the last few months and may actually be approaching a breakup point.

Emerson Electric

Risk-Adjusted Performance

11 of 100

Good

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.

Pair Trading with ServiceNow and Emerson Electric

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

The idea behind ServiceNow and Emerson Electric 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.