Correlation Between Eaton PLC and Power Solutions

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

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

Diversification Opportunities for Eaton PLC and Power Solutions

0.69

Correlation Coefficient

Eaton PLC  Power Solutions

Poor diversification

The 3 months correlation between Eaton and Power is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Eaton PLC and Power Solutions International, in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Solutions Inte 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 Power Solutions. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Solutions Inte has no effect on the direction of Eaton PLC i.e., Eaton PLC and Power Solutions go up and down completely randomly.

Pair Corralation between Eaton PLC and Power Solutions

Considering the 90-day investment horizon Eaton PLC is expected to generate 8.3 times less return on investment than Power Solutions. But when comparing it to its historical volatility, Eaton PLC is 4.6 times less risky than Power Solutions. It trades about 0.09 of its potential returns per unit of risk. Power Solutions International, is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  220.00  in Power Solutions International, on October 3, 2024 and sell it today you would earn a total of  2,755  from holding Power Solutions International, or generate 1252.27% return on investment over 90 days.

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

Eaton PLC  vs.  Power Solutions International,

Eaton PLC

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton PLC are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Eaton PLC is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Power Solutions Inte

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Power Solutions International, are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady forward indicators, Power Solutions showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Eaton PLC and Power Solutions

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

The idea behind Eaton PLC and Power Solutions International, 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.