Correlation Between Emerson Electric and EatonPLC

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

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

Diversification Opportunities for Emerson Electric and EatonPLC

0.74

Correlation Coefficient

Emerson Electric  EatonPLC

Poor diversification

The 3 months correlation between Emerson and EatonPLC is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Emerson Electric Co and Eaton PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton PLC and Emerson Electric 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 Emerson Electric Co are associated (or correlated) with EatonPLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eaton PLC has no effect on the direction of Emerson Electric i.e., Emerson Electric and EatonPLC go up and down completely randomly.

Pair Corralation between Emerson Electric and EatonPLC

Assuming the 90 days horizon Emerson Electric Co is expected to generate 0.59 times more return on investment than EatonPLC. However, Emerson Electric Co is 1.69 times less risky than EatonPLC. It trades about -0.12 of its potential returns per unit of risk. Eaton PLC is currently generating about -0.08 per unit of risk. If you would invest  12,005  in Emerson Electric Co on December 26, 2024 and sell it today you would lose (1,505) from holding Emerson Electric Co or give up 12.54% of portfolio value over 90 days.

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

Emerson Electric Co  vs.  Eaton PLC

Emerson Electric

Risk-Adjusted Performance

Very Weak

Over the last 90 days Emerson Electric Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Eaton PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Eaton PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Emerson Electric and EatonPLC

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

The idea behind Emerson Electric Co and Eaton 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.

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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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.