Correlation Between Visa and EatonPLC

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Can any of the company-specific risk be diversified away by investing in both Visa 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 Visa and EatonPLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Visa Class A and Eaton PLC, you can compare the effects of market volatilities on Visa 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 Visa with a short position of EatonPLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Visa and EatonPLC.

Diversification Opportunities for Visa and EatonPLC

0.77
  Correlation Coefficient

Poor diversification

The 3 months correlation between Visa and EatonPLC is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A and Eaton PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton PLC and Visa 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 Visa Class A 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 Visa i.e., Visa and EatonPLC go up and down completely randomly.

Pair Corralation between Visa and EatonPLC

Taking into account the 90-day investment horizon Visa is expected to generate 2.5 times less return on investment than EatonPLC. But when comparing it to its historical volatility, Visa Class A is 1.61 times less risky than EatonPLC. It trades about 0.21 of its potential returns per unit of risk. Eaton PLC is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  30,585  in Eaton PLC on September 6, 2024 and sell it today you would earn a total of  4,645  from holding Eaton PLC or generate 15.19% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy95.65%
ValuesDaily Returns

Visa Class A  vs.  Eaton PLC

 Performance 
       Timeline  
Visa Class A 

Risk-Adjusted Performance

10 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Visa may actually be approaching a critical reversion point that can send shares even higher in January 2025.
Eaton PLC 

Risk-Adjusted Performance

21 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Eaton PLC are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, EatonPLC reported solid returns over the last few months and may actually be approaching a breakup point.

Visa and EatonPLC Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Visa and EatonPLC

The main advantage of trading using opposite Visa and EatonPLC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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.
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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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