Correlation Between Xylem and Eaton PLC

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

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

Diversification Opportunities for Xylem and Eaton PLC

-0.46

Correlation Coefficient

Xylem  Eaton PLC

Very good diversification

The 3 months correlation between Xylem and Eaton is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding Xylem Inc and Eaton PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton PLC and Xylem 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 Xylem Inc are associated (or correlated) with Eaton PLC. 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 Xylem i.e., Xylem and Eaton PLC go up and down completely randomly.

Pair Corralation between Xylem and Eaton PLC

Considering the 90-day investment horizon Xylem Inc is expected to generate 1.16 times more return on investment than Eaton PLC. However, Xylem is 1.16 times more volatile than Eaton PLC. It trades about -0.1 of its potential returns per unit of risk. Eaton PLC is currently generating about -0.19 per unit of risk. If you would invest  12,248  in Xylem Inc on September 21, 2024 and sell it today you would lose (463.00) from holding Xylem Inc or give up 3.78% of portfolio value over 90 days.

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

Xylem Inc  vs.  Eaton PLC

Xylem Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Xylem Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Eaton PLC

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton PLC are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Eaton PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Xylem and Eaton PLC

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

The idea behind Xylem Inc 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.