Correlation Between 3M and Emerson Electric

Can any of the company-specific risk be diversified away by investing in both 3M 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 3M and Emerson Electric into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and Emerson Electric, you can compare the effects of market volatilities on 3M 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 3M with a short position of Emerson Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and Emerson Electric.

Diversification Opportunities for 3M and Emerson Electric

0.52

Correlation Coefficient

3M  Emerson Electric

Very weak diversification

The 3 months correlation between 3M and Emerson is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Emerson Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric 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 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 3M i.e., 3M and Emerson Electric go up and down completely randomly.

Pair Corralation between 3M and Emerson Electric

Considering the 90-day investment horizon 3M is expected to generate 1.29 times less return on investment than Emerson Electric. In addition to that, 3M is 1.33 times more volatile than Emerson Electric. It trades about 0.07 of its total potential returns per unit of risk. Emerson Electric is currently generating about 0.12 per unit of volatility. If you would invest  7,677  in Emerson Electric on February 24, 2024 and sell it today you would earn a total of  3,572  from holding Emerson Electric or generate 46.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.6%
Values	Daily Returns

3M Company  vs.  Emerson Electric

3M Company

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of very fragile primary indicators, 3M displayed solid returns over the last few months and may actually be approaching a breakup point.

Emerson Electric

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal primary indicators, Emerson Electric may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with 3M and Emerson Electric

The main advantage of trading using opposite 3M and Emerson Electric positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M 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 3M Company 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.

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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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.