Correlation Between GM and Illinois Tool

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Can any of the company-specific risk be diversified away by investing in both GM and Illinois Tool 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 GM and Illinois Tool into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Illinois Tool Works, you can compare the effects of market volatilities on GM and Illinois Tool 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 GM with a short position of Illinois Tool. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Illinois Tool.

Diversification Opportunities for GM and Illinois Tool

0.76
  Correlation Coefficient

Poor diversification

The 3 months correlation between GM and Illinois is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Illinois Tool Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Illinois Tool Works and GM 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 Motors are associated (or correlated) with Illinois Tool. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Illinois Tool Works has no effect on the direction of GM i.e., GM and Illinois Tool go up and down completely randomly.

Pair Corralation between GM and Illinois Tool

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.92 times more return on investment than Illinois Tool. However, GM is 1.92 times more volatile than Illinois Tool Works. It trades about 0.12 of its potential returns per unit of risk. Illinois Tool Works is currently generating about 0.06 per unit of risk. If you would invest  2,851  in General Motors on September 23, 2024 and sell it today you would earn a total of  2,330  from holding General Motors or generate 81.73% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy98.54%
ValuesDaily Returns

General Motors  vs.  Illinois Tool Works

 Performance 
       Timeline  
General Motors 

Risk-Adjusted Performance

4 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, GM may actually be approaching a critical reversion point that can send shares even higher in January 2025.
Illinois Tool Works 

Risk-Adjusted Performance

11 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Illinois Tool Works are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Illinois Tool may actually be approaching a critical reversion point that can send shares even higher in January 2025.

GM and Illinois Tool Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with GM and Illinois Tool

The main advantage of trading using opposite GM and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Illinois Tool 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 Illinois Tool will offset losses from the drop in Illinois Tool's long position.
The idea behind General Motors and Illinois Tool Works 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.

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