Correlation Between 3M and EatonPLC

Can any of the company-specific risk be diversified away by investing in both 3M and EatonPLC 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 3M and EatonPLC into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and Eaton PLC, you can compare the effects of market volatilities on 3M and EatonPLC 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 3M with a short position of EatonPLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and EatonPLC.

Diversification Opportunities for 3M and EatonPLC

-0.28

Correlation Coefficient

3M  EatonPLC

Very good diversification

The 3 months correlation between 3M and EatonPLC is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Eaton PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton PLC and 3M 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 3M Company are associated (or correlated) with EatonPLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eaton PLC has no effect on the direction of 3M i.e., 3M and EatonPLC go up and down completely randomly.

Pair Corralation between 3M and EatonPLC

Assuming the 90 days horizon 3M Company is expected to generate 0.56 times more return on investment than EatonPLC. However, 3M Company is 1.79 times less risky than EatonPLC. It trades about 0.15 of its potential returns per unit of risk. Eaton PLC is currently generating about -0.06 per unit of risk. If you would invest  12,365  in 3M Company on December 27, 2024 and sell it today you would earn a total of  1,819  from holding 3M Company or generate 14.71% return on investment over 90 days.

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

3M Company  vs.  Eaton PLC

3M Company

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, 3M reported solid returns over the last few months and may actually be approaching a breakup point.

Eaton PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Eaton PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with 3M and EatonPLC

The main advantage of trading using opposite 3M and EatonPLC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, EatonPLC 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 EatonPLC will offset losses from the drop in EatonPLC's long position.

The idea behind 3M Company and Eaton 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.