Correlation Between GM and Illinois Tool
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 Period | 3 Months [change] |
Direction | Moves Together |
Strength | Significant |
Accuracy | 98.54% |
Values | Daily Returns |
General Motors vs. Illinois Tool Works
Performance |
Timeline |
General Motors |
Illinois Tool Works |
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.Illinois Tool vs. Honeywell International | Illinois Tool vs. Schneider Electric SE | Illinois Tool vs. Eaton PLC | Illinois Tool vs. ABB |
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 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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