Correlation Between 3M and Trane Technologies

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Can any of the company-specific risk be diversified away by investing in both 3M and Trane Technologies 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 3M and Trane Technologies into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between 3M Company and Trane Technologies plc, you can compare the effects of market volatilities on 3M and Trane Technologies 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 3M with a short position of Trane Technologies. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and Trane Technologies.

Diversification Opportunities for 3M and Trane Technologies

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between 3M and Trane is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Trane Technologies plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trane Technologies plc and 3M 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 3M Company are associated (or correlated) with Trane Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trane Technologies plc has no effect on the direction of 3M i.e., 3M and Trane Technologies go up and down completely randomly.

Pair Corralation between 3M and Trane Technologies

Assuming the 90 days horizon 3M is expected to generate 1.64 times less return on investment than Trane Technologies. But when comparing it to its historical volatility, 3M Company is 1.17 times less risky than Trane Technologies. It trades about 0.15 of its potential returns per unit of risk. Trane Technologies plc is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  36,430  in Trane Technologies plc on August 29, 2024 and sell it today you would earn a total of  3,560  from holding Trane Technologies plc or generate 9.77% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

3M Company  vs.  Trane Technologies plc

 Performance 
       Timeline  
3M Company 

Risk-Adjusted Performance

5 of 100

 
Weak
 
Strong
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, 3M may actually be approaching a critical reversion point that can send shares even higher in December 2024.
Trane Technologies plc 

Risk-Adjusted Performance

17 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Trane Technologies plc are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Trane Technologies reported solid returns over the last few months and may actually be approaching a breakup point.

3M and Trane Technologies Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with 3M and Trane Technologies

The main advantage of trading using opposite 3M and Trane Technologies positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, Trane Technologies 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 Trane Technologies will offset losses from the drop in Trane Technologies' long position.
The idea behind 3M Company and Trane Technologies plc 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.

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