Correlation Between Illinois Tool and Watts Water

Can any of the company-specific risk be diversified away by investing in both Illinois Tool and Watts Water 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 Watts Water 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 Watts Water Technologies, you can compare the effects of market volatilities on Illinois Tool and Watts Water 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 Watts Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Illinois Tool and Watts Water.

Diversification Opportunities for Illinois Tool and Watts Water

0.68

Correlation Coefficient

Illinois Tool  Watts Water

Poor diversification

The 3 months correlation between Illinois and Watts is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Illinois Tool Works and Watts Water Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watts Water Technologies 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 Watts Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watts Water Technologies has no effect on the direction of Illinois Tool i.e., Illinois Tool and Watts Water go up and down completely randomly.

Pair Corralation between Illinois Tool and Watts Water

Considering the 90-day investment horizon Illinois Tool is expected to generate 174.25 times less return on investment than Watts Water. But when comparing it to its historical volatility, Illinois Tool Works is 1.24 times less risky than Watts Water. It trades about 0.0 of its potential returns per unit of risk. Watts Water Technologies is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  20,249  in Watts Water Technologies on December 28, 2024 and sell it today you would earn a total of  685.00  from holding Watts Water Technologies or generate 3.38% return on investment over 90 days.

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

Illinois Tool Works  vs.  Watts Water Technologies

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.

Watts Water Technologies

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Watts Water Technologies are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Watts Water is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Illinois Tool and Watts Water

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

The idea behind Illinois Tool Works and Watts Water Technologies 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.