Correlation Between Emerson Electric and Donaldson

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Can any of the company-specific risk be diversified away by investing in both Emerson Electric and Donaldson 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 Emerson Electric and Donaldson into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Emerson Electric and Donaldson, you can compare the effects of market volatilities on Emerson Electric and Donaldson 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 Emerson Electric with a short position of Donaldson. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerson Electric and Donaldson.

Diversification Opportunities for Emerson Electric and Donaldson

0.85
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Emerson and Donaldson is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Emerson Electric and Donaldson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Donaldson and Emerson 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 Emerson Electric are associated (or correlated) with Donaldson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Donaldson has no effect on the direction of Emerson Electric i.e., Emerson Electric and Donaldson go up and down completely randomly.

Pair Corralation between Emerson Electric and Donaldson

Considering the 90-day investment horizon Emerson Electric is expected to generate 2.58 times more return on investment than Donaldson. However, Emerson Electric is 2.58 times more volatile than Donaldson. It trades about 0.35 of its potential returns per unit of risk. Donaldson is currently generating about 0.15 per unit of risk. If you would invest  10,807  in Emerson Electric on August 24, 2024 and sell it today you would earn a total of  2,020  from holding Emerson Electric or generate 18.69% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Emerson Electric  vs.  Donaldson

 Performance 
       Timeline  
Emerson Electric 

Risk-Adjusted Performance

14 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 14 (%) 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.
Donaldson 

Risk-Adjusted Performance

2 of 100

 
Weak
 
Strong
Weak
Compared to the overall equity markets, risk-adjusted returns on investments in Donaldson are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong fundamental indicators, Donaldson is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Emerson Electric and Donaldson Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Emerson Electric and Donaldson

The main advantage of trading using opposite Emerson Electric and Donaldson positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerson Electric position performs unexpectedly, Donaldson 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 Donaldson will offset losses from the drop in Donaldson's long position.
The idea behind Emerson Electric and Donaldson 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 Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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