Correlation Between Prudential Financial and Eaton Plc

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

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

Diversification Opportunities for Prudential Financial and Eaton Plc

0.86

Correlation Coefficient

Prudential Financial  Eaton Plc

Very poor diversification

The 3 months correlation between Prudential and Eaton is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Prudential Financial and Eaton plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton plc and Prudential Financial 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 Prudential Financial 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 Prudential Financial i.e., Prudential Financial and Eaton Plc go up and down completely randomly.

Pair Corralation between Prudential Financial and Eaton Plc

Assuming the 90 days trading horizon Prudential Financial is expected to generate 1.06 times more return on investment than Eaton Plc. However, Prudential Financial is 1.06 times more volatile than Eaton plc. It trades about 0.17 of its potential returns per unit of risk. Eaton plc is currently generating about 0.13 per unit of risk. If you would invest  32,340  in Prudential Financial on September 23, 2024 and sell it today you would earn a total of  6,150  from holding Prudential Financial or generate 19.02% return on investment over 90 days.

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

Prudential Financial  vs.  Eaton plc

Prudential Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Eaton plc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Eaton Plc sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Prudential Financial and Eaton Plc

The main advantage of trading using opposite Prudential Financial and Eaton Plc positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Prudential Financial 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 Prudential Financial 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .