Correlation Between Donaldson and ITT

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

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

Diversification Opportunities for Donaldson and ITT

0.69

Correlation Coefficient

Donaldson  ITT

Poor diversification

The 3 months correlation between Donaldson and ITT is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Donaldson and ITT Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ITT Inc and Donaldson 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 Donaldson are associated (or correlated) with ITT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ITT Inc has no effect on the direction of Donaldson i.e., Donaldson and ITT go up and down completely randomly.

Pair Corralation between Donaldson and ITT

Considering the 90-day investment horizon Donaldson is expected to generate 1.69 times less return on investment than ITT. But when comparing it to its historical volatility, Donaldson is 1.31 times less risky than ITT. It trades about 0.06 of its potential returns per unit of risk. ITT Inc is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  7,297  in ITT Inc on February 28, 2024 and sell it today you would earn a total of  6,278  from holding ITT Inc or generate 86.04% return on investment over 90 days.

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

Donaldson  vs.  ITT Inc

Donaldson

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Donaldson are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong fundamental indicators, Donaldson is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

ITT Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ITT Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, ITT may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Donaldson and ITT

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

The idea behind Donaldson and ITT Inc 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.