Correlation Between Smith AO and Illinois Tool

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

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

Diversification Opportunities for Smith AO and Illinois Tool

0.15

Correlation Coefficient

Smith AO  Illinois Tool

Average diversification

The 3 months correlation between Smith and Illinois is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Smith AO 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 Smith AO 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 Smith AO 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 Smith AO i.e., Smith AO and Illinois Tool go up and down completely randomly.

Pair Corralation between Smith AO and Illinois Tool

Considering the 90-day investment horizon Smith AO is expected to under-perform the Illinois Tool. But the stock apears to be less risky and, when comparing its historical volatility, Smith AO is 1.01 times less risky than Illinois Tool. The stock trades about -0.03 of its potential returns per unit of risk. The Illinois Tool Works is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  25,333  in Illinois Tool Works on December 28, 2024 and sell it today you would lose (687.00) from holding Illinois Tool Works or give up 2.71% of portfolio value over 90 days.

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

Smith AO  vs.  Illinois Tool Works

Smith AO

Risk-Adjusted Performance

Very Weak

Over the last 90 days Smith AO has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Smith AO is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Illinois Tool Works

Risk-Adjusted Performance

Very Weak

Over the last 90 days Illinois Tool Works has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Illinois Tool is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Smith AO and Illinois Tool

The main advantage of trading using opposite Smith AO and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smith AO 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 Smith AO 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.

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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.