Correlation Between Eaton PLC and Smiths Group

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

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

Diversification Opportunities for Eaton PLC and Smiths Group

-0.67

Correlation Coefficient

Eaton PLC  Smiths Group

Excellent diversification

The 3 months correlation between Eaton and Smiths is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Eaton PLC and Smiths Group Plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smiths Group Plc 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 Smiths Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smiths Group Plc has no effect on the direction of Eaton PLC i.e., Eaton PLC and Smiths Group go up and down completely randomly.

Pair Corralation between Eaton PLC and Smiths Group

Considering the 90-day investment horizon Eaton PLC is expected to under-perform the Smiths Group. In addition to that, Eaton PLC is 1.13 times more volatile than Smiths Group Plc. It trades about -0.04 of its total potential returns per unit of risk. Smiths Group Plc is currently generating about 0.1 per unit of volatility. If you would invest  2,203  in Smiths Group Plc on November 29, 2024 and sell it today you would earn a total of  427.00  from holding Smiths Group Plc or generate 19.38% return on investment over 90 days.

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

Eaton PLC  vs.  Smiths Group Plc

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. In spite of abnormal performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in March 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Smiths Group Plc

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smiths Group Plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Smiths Group showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Eaton PLC and Smiths Group

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

The idea behind Eaton PLC and Smiths Group 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.