Correlation Between Illinois Tool and Smiths Group

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

By analyzing existing cross correlation between Illinois Tool Works and Smiths Group Plc, you can compare the effects of market volatilities on Illinois Tool 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 Illinois Tool with a short position of Smiths Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of Illinois Tool and Smiths Group.

Diversification Opportunities for Illinois Tool and Smiths Group

0.44

Correlation Coefficient

Illinois Tool  Smiths Group

Very weak diversification

The 3 months correlation between Illinois and Smiths is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Illinois Tool Works 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 Illinois Tool 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 Illinois Tool Works 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 Illinois Tool i.e., Illinois Tool and Smiths Group go up and down completely randomly.

Pair Corralation between Illinois Tool and Smiths Group

Considering the 90-day investment horizon Illinois Tool Works is expected to under-perform the Smiths Group. But the stock apears to be less risky and, when comparing its historical volatility, Illinois Tool Works is 1.4 times less risky than Smiths Group. The stock trades about -0.03 of its potential returns per unit of risk. The Smiths Group Plc is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  2,160  in Smiths Group Plc on December 29, 2024 and sell it today you would earn a total of  398.00  from holding Smiths Group Plc or generate 18.43% return on investment over 90 days.

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

Illinois Tool Works  vs.  Smiths Group Plc

Illinois Tool Works

Risk-Adjusted Performance

Very Weak

Over the last 90 days Illinois Tool Works has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Illinois Tool is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Smiths Group Plc

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smiths Group Plc are ranked lower than 11 (%) 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 Illinois Tool and Smiths Group

The main advantage of trading using opposite Illinois Tool and Smiths Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Illinois Tool 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 Illinois Tool Works 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.