Correlation Between United Utilities and Lincoln Electric

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

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

Diversification Opportunities for United Utilities and Lincoln Electric

0.33

Correlation Coefficient

United Utilities  Lincoln Electric

Weak diversification

The 3 months correlation between United and Lincoln is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding United Utilities Group 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 United Utilities 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 United Utilities Group 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 United Utilities i.e., United Utilities and Lincoln Electric go up and down completely randomly.

Pair Corralation between United Utilities and Lincoln Electric

Assuming the 90 days horizon United Utilities is expected to generate 1.44 times less return on investment than Lincoln Electric. In addition to that, United Utilities is 1.16 times more volatile than Lincoln Electric Holdings. It trades about 0.03 of its total potential returns per unit of risk. Lincoln Electric Holdings is currently generating about 0.04 per unit of volatility. If you would invest  14,268  in Lincoln Electric Holdings on September 24, 2024 and sell it today you would earn a total of  4,622  from holding Lincoln Electric Holdings or generate 32.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	62.05%
Values	Daily Returns

United Utilities Group  vs.  Lincoln Electric Holdings

United Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Lincoln Electric Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lincoln Electric Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Lincoln Electric is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with United Utilities and Lincoln Electric

The main advantage of trading using opposite United Utilities and Lincoln Electric positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United Utilities 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 United Utilities Group 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.

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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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.