Correlation Between Cummins and Illinois Tool

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

By analyzing existing cross correlation between Cummins and Illinois Tool Works, you can compare the effects of market volatilities on Cummins and Illinois Tool 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 Illinois Tool. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cummins and Illinois Tool.

Diversification Opportunities for Cummins and Illinois Tool

0.92

Correlation Coefficient

Cummins  Illinois Tool

Almost no diversification

The 3 months correlation between Cummins and Illinois is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Cummins and Illinois Tool Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Illinois Tool Works 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 Illinois Tool. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Illinois Tool Works has no effect on the direction of Cummins i.e., Cummins and Illinois Tool go up and down completely randomly.

Pair Corralation between Cummins and Illinois Tool

Considering the 90-day investment horizon Cummins is expected to generate 1.7 times more return on investment than Illinois Tool. However, Cummins is 1.7 times more volatile than Illinois Tool Works. It trades about 0.25 of its potential returns per unit of risk. Illinois Tool Works is currently generating about 0.19 per unit of risk. If you would invest  32,997  in Cummins on August 24, 2024 and sell it today you would earn a total of  3,889  from holding Cummins or generate 11.79% return on investment over 90 days.

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

Cummins  vs.  Illinois Tool Works

Cummins

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak primary indicators, Cummins demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Illinois Tool Works

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Illinois Tool Works are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Illinois Tool may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Cummins and Illinois Tool

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

The idea behind Cummins and Illinois Tool Works 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.