Correlation Between Illinois Tool and Small Cap

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

By analyzing existing cross correlation between Illinois Tool Works and Small Cap Core, you can compare the effects of market volatilities on Illinois Tool and Small Cap 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 Illinois Tool with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Illinois Tool and Small Cap.

Diversification Opportunities for Illinois Tool and Small Cap

0.83

Correlation Coefficient

Illinois Tool  Small Cap

Very poor diversification

The 3 months correlation between Illinois and Small is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Illinois Tool Works and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Illinois Tool 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 Illinois Tool Works are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Core has no effect on the direction of Illinois Tool i.e., Illinois Tool and Small Cap go up and down completely randomly.

Pair Corralation between Illinois Tool and Small Cap

Considering the 90-day investment horizon Illinois Tool Works is expected to generate 0.77 times more return on investment than Small Cap. However, Illinois Tool Works is 1.3 times less risky than Small Cap. It trades about 0.14 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.06 per unit of risk. If you would invest  24,719  in Illinois Tool Works on August 24, 2024 and sell it today you would earn a total of  2,266  from holding Illinois Tool Works or generate 9.17% return on investment over 90 days.

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

Illinois Tool Works  vs.  Small Cap Core

Illinois Tool Works

Risk-Adjusted Performance

11 of 100

Good

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 weak basic indicators, Illinois Tool may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Small Cap Core

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Core are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Illinois Tool and Small Cap

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

The idea behind Illinois Tool Works and Small Cap Core 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.