Correlation Between US Bancorp and Honeywell International

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

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

Diversification Opportunities for US Bancorp and Honeywell International

0.55

Correlation Coefficient

US Bancorp  Honeywell International

Very weak diversification

The 3 months correlation between USB and Honeywell is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding US Bancorp and Honeywell International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Honeywell International and US Bancorp 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 US Bancorp are associated (or correlated) with Honeywell International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Honeywell International has no effect on the direction of US Bancorp i.e., US Bancorp and Honeywell International go up and down completely randomly.

Pair Corralation between US Bancorp and Honeywell International

Assuming the 90 days trading horizon US Bancorp is expected to generate 0.43 times more return on investment than Honeywell International. However, US Bancorp is 2.33 times less risky than Honeywell International. It trades about -0.09 of its potential returns per unit of risk. Honeywell International is currently generating about -0.07 per unit of risk. If you would invest  99,061  in US Bancorp on December 5, 2024 and sell it today you would lose (3,193) from holding US Bancorp or give up 3.22% of portfolio value over 90 days.

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

US Bancorp  vs.  Honeywell International

US Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days US Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, US Bancorp is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Honeywell International

Risk-Adjusted Performance

Very Weak

Over the last 90 days Honeywell International has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Honeywell International is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with US Bancorp and Honeywell International

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

The idea behind US Bancorp and Honeywell International 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.