Correlation Between General Electric and Illinois Tool

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

Diversification Opportunities for General Electric and Illinois Tool

0.96
  Correlation Coefficient

Almost no diversification

The 3 months correlation between General and Illinois is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding General Electric 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 General Electric 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 General Electric 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 General Electric i.e., General Electric and Illinois Tool go up and down completely randomly.

Pair Corralation between General Electric and Illinois Tool

Allowing for the 90-day total investment horizon General Electric is expected to generate 1.19 times more return on investment than Illinois Tool. However, General Electric is 1.19 times more volatile than Illinois Tool Works. It trades about 0.06 of its potential returns per unit of risk. Illinois Tool Works is currently generating about 0.06 per unit of risk. If you would invest  7,810  in General Electric on August 29, 2022 and sell it today you would earn a total of  1,004  from holding General Electric or generate 12.86% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

General Electric  vs.  Illinois Tool Works

 Performance (%) 
       Timeline  
General Electric 
General Performance
9 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in General Electric are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, General Electric exhibited solid returns over the last few months and may actually be approaching a breakup point.

General Price Channel

Illinois Tool Works 
Illinois Performance
11 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Illinois Tool Works are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly sluggish basic indicators, Illinois Tool showed solid returns over the last few months and may actually be approaching a breakup point.

Illinois Price Channel

General Electric and Illinois Tool Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with General Electric and Illinois Tool

The main advantage of trading using opposite General Electric and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if General Electric 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.
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The idea behind General Electric 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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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.

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