Correlation Between Xylem and Emerson Electric
Can any of the company-specific risk be diversified away by investing in both Xylem and Emerson Electric 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 Emerson Electric into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Xylem Inc and Emerson Electric, you can compare the effects of market volatilities on Xylem and Emerson Electric 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 Emerson Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Xylem and Emerson Electric.
Diversification Opportunities for Xylem and Emerson Electric
-0.01 | Correlation Coefficient |
Good diversification
The 3 months correlation between Xylem and Emerson is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Xylem Inc and Emerson Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric 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 Emerson Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerson Electric has no effect on the direction of Xylem i.e., Xylem and Emerson Electric go up and down completely randomly.
Pair Corralation between Xylem and Emerson Electric
Considering the 90-day investment horizon Xylem is expected to generate 2.5 times less return on investment than Emerson Electric. But when comparing it to its historical volatility, Xylem Inc is 1.14 times less risky than Emerson Electric. It trades about 0.03 of its potential returns per unit of risk. Emerson Electric is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 8,229 in Emerson Electric on November 1, 2024 and sell it today you would earn a total of 4,904 from holding Emerson Electric or generate 59.59% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Xylem Inc vs. Emerson Electric
Performance |
| Timeline |
| Xylem Inc |
| Emerson Electric |
Xylem and Emerson Electric Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Xylem and Emerson Electric
The main advantage of trading using opposite Xylem and Emerson Electric positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Xylem position performs unexpectedly, Emerson Electric 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 Emerson Electric will offset losses from the drop in Emerson Electric's long position.The idea behind Xylem Inc and Emerson Electric 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.| Emerson Electric vs. Dover | Emerson Electric vs. Parker Hannifin | Emerson Electric vs. Pentair PLC | Emerson Electric vs. Eaton PLC |
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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.
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