Correlation Between Crane and GE Aerospace
Can any of the company-specific risk be diversified away by investing in both Crane and GE Aerospace 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 Crane and GE Aerospace into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Crane Company and GE Aerospace, you can compare the effects of market volatilities on Crane and GE Aerospace 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 Crane with a short position of GE Aerospace. Check out your portfolio center. Please also check ongoing floating volatility patterns of Crane and GE Aerospace.
Diversification Opportunities for Crane and GE Aerospace
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Crane and GE Aerospace is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Crane Company and GE Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GE Aerospace and Crane 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 Crane Company are associated (or correlated) with GE Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GE Aerospace has no effect on the direction of Crane i.e., Crane and GE Aerospace go up and down completely randomly.
Pair Corralation between Crane and GE Aerospace
Allowing for the 90-day total investment horizon Crane is expected to generate 2.4 times less return on investment than GE Aerospace. But when comparing it to its historical volatility, Crane Company is 1.74 times less risky than GE Aerospace. It trades about 0.17 of its potential returns per unit of risk. GE Aerospace is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest 13,826 in GE Aerospace on January 26, 2024 and sell it today you would earn a total of 2,093 from holding GE Aerospace or generate 15.14% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Crane Company vs. GE Aerospace
Performance |
| Timeline |
| Crane Company |
| GE Aerospace |
Crane and GE Aerospace Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Crane and GE Aerospace
The main advantage of trading using opposite Crane and GE Aerospace positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Crane position performs unexpectedly, GE Aerospace 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 GE Aerospace will offset losses from the drop in GE Aerospace's long position.The idea behind Crane Company and GE Aerospace 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.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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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