Correlation Between Eaton PLC and Smith AO

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

By analyzing existing cross correlation between Eaton PLC and Smith AO, you can compare the effects of market volatilities on Eaton PLC and Smith AO 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 Smith AO. Check out your portfolio center. Please also check ongoing floating volatility patterns of Eaton PLC and Smith AO.

Diversification Opportunities for Eaton PLC and Smith AO

-0.43

Correlation Coefficient

Eaton PLC  Smith AO

Very good diversification

The 3 months correlation between Eaton and Smith is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Eaton PLC and Smith AO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith AO 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 Smith AO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith AO has no effect on the direction of Eaton PLC i.e., Eaton PLC and Smith AO go up and down completely randomly.

Pair Corralation between Eaton PLC and Smith AO

Considering the 90-day investment horizon Eaton PLC is expected to generate 1.08 times more return on investment than Smith AO. However, Eaton PLC is 1.08 times more volatile than Smith AO. It trades about 0.19 of its potential returns per unit of risk. Smith AO is currently generating about -0.11 per unit of risk. If you would invest  30,607  in Eaton PLC on August 30, 2024 and sell it today you would earn a total of  6,591  from holding Eaton PLC or generate 21.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Eaton PLC  vs.  Smith AO

Eaton PLC

Risk-Adjusted Performance

14 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton PLC are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain basic indicators, Eaton PLC displayed solid returns over the last few months and may actually be approaching a breakup point.

Smith AO

Risk-Adjusted Performance

0 of 100

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 latest abnormal performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Eaton PLC and Smith AO

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

The idea behind Eaton PLC and Smith AO 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.