Correlation Between Cummins and Deere
Can any of the company-specific risk be diversified away by investing in both Cummins and Deere 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 Cummins and Deere into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cummins and Deere Company, you can compare the effects of market volatilities on Cummins and Deere 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 Cummins with a short position of Deere. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cummins and Deere.
Diversification Opportunities for Cummins and Deere
Very weak diversification
The 3 months correlation between Cummins and Deere is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Deere Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Deere Company and Cummins 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 Cummins are associated (or correlated) with Deere. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Deere Company has no effect on the direction of Cummins i.e., Cummins and Deere go up and down completely randomly.
Pair Corralation between Cummins and Deere
Considering the 90-day investment horizon Cummins is expected to generate 1.4 times less return on investment than Deere. But when comparing it to its historical volatility, Cummins is 1.46 times less risky than Deere. It trades about 0.08 of its potential returns per unit of risk. Deere Company is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 39,260 in Deere Company on January 20, 2024 and sell it today you would earn a total of 800.00 from holding Deere Company or generate 2.04% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cummins vs. Deere Company
Performance |
| Timeline |
| Cummins |
| Deere Company |
Cummins and Deere Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cummins and Deere
The main advantage of trading using opposite Cummins and Deere positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cummins position performs unexpectedly, Deere 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 Deere will offset losses from the drop in Deere's long position.The idea behind Cummins and Deere Company 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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