Correlation Between Xylem and Cummins

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

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

Diversification Opportunities for Xylem and Cummins

-0.51

Correlation Coefficient

Xylem  Cummins

Excellent diversification

The 3 months correlation between Xylem and Cummins is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Xylem Inc and Cummins in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cummins and Xylem 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 Xylem Inc 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 Xylem i.e., Xylem and Cummins go up and down completely randomly.

Pair Corralation between Xylem and Cummins

Considering the 90-day investment horizon Xylem is expected to generate 3.83 times less return on investment than Cummins. But when comparing it to its historical volatility, Xylem Inc is 1.09 times less risky than Cummins. It trades about 0.02 of its potential returns per unit of risk. Cummins is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  23,202  in Cummins on September 30, 2024 and sell it today you would earn a total of  11,913  from holding Cummins or generate 51.34% return on investment over 90 days.

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

Xylem Inc  vs.  Cummins

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.

Cummins

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite fairly abnormal primary indicators, Cummins may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Xylem and Cummins

The main advantage of trading using opposite Xylem and Cummins positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Xylem 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 Xylem Inc 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.