Correlation Between General Electric and Eaton Plc

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

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

Diversification Opportunities for General Electric and Eaton Plc

0.66

Correlation Coefficient

General Electric  Eaton Plc

Poor diversification

The 3 months correlation between General and Eaton is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding General Electric and Eaton plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton plc and General 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 General Electric are associated (or correlated) with Eaton Plc. 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 General Electric i.e., General Electric and Eaton Plc go up and down completely randomly.

Pair Corralation between General Electric and Eaton Plc

Assuming the 90 days trading horizon General Electric is expected to under-perform the Eaton Plc. In addition to that, General Electric is 1.47 times more volatile than Eaton plc. It trades about -0.07 of its total potential returns per unit of risk. Eaton plc is currently generating about 0.18 per unit of volatility. If you would invest  13,665  in Eaton plc on September 13, 2024 and sell it today you would earn a total of  1,829  from holding Eaton plc or generate 13.38% return on investment over 90 days.

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

General Electric  vs.  Eaton plc

General Electric

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in General Electric are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, General Electric is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Eaton plc

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton plc are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Eaton Plc sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with General Electric and Eaton Plc

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

The idea behind General Electric 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.