Correlation Between Makita and Lincoln Electric

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

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

Diversification Opportunities for Makita and Lincoln Electric

-0.17

Correlation Coefficient

Makita  Lincoln Electric

Good diversification

The 3 months correlation between Makita and Lincoln is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Makita and Lincoln Electric Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lincoln Electric Holdings and Makita 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 Makita are associated (or correlated) with Lincoln Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lincoln Electric Holdings has no effect on the direction of Makita i.e., Makita and Lincoln Electric go up and down completely randomly.

Pair Corralation between Makita and Lincoln Electric

Assuming the 90 days trading horizon Makita is expected to generate 1.06 times more return on investment than Lincoln Electric. However, Makita is 1.06 times more volatile than Lincoln Electric Holdings. It trades about 0.11 of its potential returns per unit of risk. Lincoln Electric Holdings is currently generating about -0.02 per unit of risk. If you would invest  2,862  in Makita on December 22, 2024 and sell it today you would earn a total of  424.00  from holding Makita or generate 14.81% return on investment over 90 days.

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

Makita  vs.  Lincoln Electric Holdings

Makita

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Makita are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Makita reported solid returns over the last few months and may actually be approaching a breakup point.

Lincoln Electric Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lincoln Electric Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Lincoln Electric is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Makita and Lincoln Electric

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

The idea behind Makita and Lincoln Electric Holdings 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.