Correlation Between Eaton Plc and Align Technology

Can any of the company-specific risk be diversified away by investing in both Eaton Plc and Align Technology 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 Eaton Plc and Align Technology into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Eaton plc and Align Technology, you can compare the effects of market volatilities on Eaton Plc and Align Technology 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 Eaton Plc with a short position of Align Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Eaton Plc and Align Technology.

Diversification Opportunities for Eaton Plc and Align Technology

0.47

Correlation Coefficient

Eaton Plc  Align Technology

Very weak diversification

The 3 months correlation between Eaton and Align is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Eaton plc and Align Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Align Technology and Eaton Plc 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 Eaton plc are associated (or correlated) with Align Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Align Technology has no effect on the direction of Eaton Plc i.e., Eaton Plc and Align Technology go up and down completely randomly.

Pair Corralation between Eaton Plc and Align Technology

Assuming the 90 days trading horizon Eaton plc is expected to generate 1.12 times more return on investment than Align Technology. However, Eaton Plc is 1.12 times more volatile than Align Technology. It trades about 0.23 of its potential returns per unit of risk. Align Technology is currently generating about 0.13 per unit of risk. If you would invest  12,176  in Eaton plc on September 13, 2024 and sell it today you would earn a total of  3,319  from holding Eaton plc or generate 27.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Eaton plc  vs.  Align Technology

Eaton plc

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton plc are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Eaton Plc sustained solid returns over the last few months and may actually be approaching a breakup point.

Align Technology

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Align Technology are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak essential indicators, Align Technology sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Eaton Plc and Align Technology

The main advantage of trading using opposite Eaton Plc and Align Technology positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Eaton Plc position performs unexpectedly, Align Technology 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 Align Technology will offset losses from the drop in Align Technology's long position.

The idea behind Eaton plc and Align Technology 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.