Correlation Between Siemens AG and Illinois Tool

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

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

Diversification Opportunities for Siemens AG and Illinois Tool

0.28

Correlation Coefficient

Siemens AG  Illinois Tool

Modest diversification

The 3 months correlation between Siemens and Illinois is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Siemens AG Class 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 Siemens AG 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 Siemens AG Class 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 Siemens AG i.e., Siemens AG and Illinois Tool go up and down completely randomly.

Pair Corralation between Siemens AG and Illinois Tool

Assuming the 90 days horizon Siemens AG Class is expected to generate 1.88 times more return on investment than Illinois Tool. However, Siemens AG is 1.88 times more volatile than Illinois Tool Works. It trades about 0.17 of its potential returns per unit of risk. Illinois Tool Works is currently generating about -0.02 per unit of risk. If you would invest  19,690  in Siemens AG Class on December 22, 2024 and sell it today you would earn a total of  5,310  from holding Siemens AG Class or generate 26.97% return on investment over 90 days.

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

Siemens AG Class  vs.  Illinois Tool Works

Siemens AG Class

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Siemens AG Class are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Siemens AG reported solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Siemens AG and Illinois Tool

The main advantage of trading using opposite Siemens AG and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Siemens AG 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 Siemens AG Class 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.

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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.