Correlation Between Eaton PLC and Xylem

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

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

Diversification Opportunities for Eaton PLC and Xylem

-0.46

Correlation Coefficient

Eaton PLC  Xylem

Very good diversification

The 3 months correlation between Eaton and Xylem is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding Eaton PLC and Xylem Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xylem Inc 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 Xylem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xylem Inc has no effect on the direction of Eaton PLC i.e., Eaton PLC and Xylem go up and down completely randomly.

Pair Corralation between Eaton PLC and Xylem

Considering the 90-day investment horizon Eaton PLC is expected to under-perform the Xylem. But the stock apears to be less risky and, when comparing its historical volatility, Eaton PLC is 1.16 times less risky than Xylem. The stock trades about -0.19 of its potential returns per unit of risk. The Xylem Inc is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  12,248  in Xylem Inc on September 21, 2024 and sell it today you would lose (463.00) from holding Xylem Inc or give up 3.78% of portfolio value over 90 days.

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

Eaton PLC  vs.  Xylem Inc

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 current stock price disarray, may contribute to short-term losses for the investors.

Xylem Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Xylem Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with Eaton PLC and Xylem

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

The idea behind Eaton PLC and Xylem Inc 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.