Correlation Between Bank of America and Illinois Tool
Can any of the company-specific risk be diversified away by investing in both Bank of America 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 Bank of America and Illinois Tool into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Verizon Communications and Illinois Tool Works, you can compare the effects of market volatilities on Bank of America 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 Bank of America with a short position of Illinois Tool. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and Illinois Tool.
Diversification Opportunities for Bank of America and Illinois Tool
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Bank and Illinois is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications 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 Bank of America 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 Verizon Communications 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 Bank of America i.e., Bank of America and Illinois Tool go up and down completely randomly.
Pair Corralation between Bank of America and Illinois Tool
Assuming the 90 days trading horizon Verizon Communications is expected to generate 0.83 times more return on investment than Illinois Tool. However, Verizon Communications is 1.21 times less risky than Illinois Tool. It trades about 0.31 of its potential returns per unit of risk. Illinois Tool Works is currently generating about 0.11 per unit of risk. If you would invest 3,860 in Verizon Communications on November 27, 2024 and sell it today you would earn a total of 260.00 from holding Verizon Communications or generate 6.74% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Verizon Communications vs. Illinois Tool Works
Performance |
| Timeline |
| Verizon Communications |
| Illinois Tool Works |
Bank of America and Illinois Tool Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Bank of America and Illinois Tool
The main advantage of trading using opposite Bank of America and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of America 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.| Bank of America vs. Collins Foods Limited | Bank of America vs. Perdoceo Education | Bank of America vs. China Modern Dairy | Bank of America vs. Waste Management |
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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 the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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